Building Credit from Scratch: Where to Start – Savings Corner presented by Coosa Valley Credit Union

We often see advice on how to fix bad credit, but how do you build credit in the first place? Everyone starts with what’s called zero credit, which means you start with a clean slate. Having good credit is important because it tells lenders you’re trustworthy and gives you access to the best interest rates when borrowing money. This is very important when borrowing large sums, such as with a mortgage. To build reliability, you need to build credit in a positive direction, usually starting with low-limit credit cards or a small loan.

First, establish a strong relationship with your financial institution. Lenders are much more likely to determine that you are trustworthy if you already have a good banking relationship. You should always maintain a well-managed checking account. It shows that you manage money responsibly. Don’t write NSF checks or spend when you know there isn’t enough money in your account to cover the transaction. Open a savings account and make regular payments.

Once you have an established banking relationship, here are some ways to build credit without having to resort to a credit card, which is often difficult for someone just starting out.

1. Special loan products designed to establish credit. These are often referred to as “credit creator” loans or equity-backed loans. With equity-backed loans, you use money from your savings account as collateral, so there is very little risk to the financial institution and the interest rate is usually very low. Equity-backed loans are great for building credit without going into debt.
2. Be an authorized user on a parent’s account (make sure they pay responsibly, though, or your credit could be damaged). Or take out a small loan with a qualified co-signer.
3. Secure cards. Secured cards are usually for people who have been denied credit. The bank doesn’t want the liability, so you need to load the card with your own money as collateral. After that it is used like a credit card. Secured cards also come with lots of fees and high interest rates – compare terms and conditions before applying.
4. Low limit store credit cards (pay in full monthly). Never carry more than one credit card at a time (this also includes department store cards). Department stores entice you to apply for credit with certain financial “incentives” – usually 10-20% off your first initial purchase. However, if your credit card interest is at 20% (and it probably is), you’re not saving a penny at the end of the month.

Finally, a note on using credit cards to build credit history. Some people say that having debt that you pay monthly can increase your credit score. In the case of credit cards, you have to charge a small amount each month ($50) and pay it back in full each month. This will achieve the same results as carrying a debt. The best way to establish your credit history and score is to make regular payments on two business lines for 24 consecutive months. Loading $50 onto a card and then paying it back is usually enough.