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How to build credit from scratch

With some solid first steps and a focus on paying your bills on time, you'll be on your way to building a solid credit score.

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How do I build credit from scratch? Building your credit for the first time can feel a little like the chicken and the egg. To build a good credit score, you’re going to need to take out a loan or get a credit card, but you can’t qualify for a loan or get a credit card without some credit history, right? So what do you do?

Let’s start with a bank account. You don’t really need a long credit history to open a checking account at your local bank. In fact, you may have one already. Even though a checking account won’t necessarily help you build credit history with the bureaus, that account may help you get your first credit card or loan from the same provider. You see, if you already have a history of doing good business with the bank, they know you and value that business. That existing relationship can carry some weight when it comes time to get your first line of credit.

Another idea is to put one or more utilities in your own name. While companies aren’t required to report on-time payments to your credit bureau, some do, and some may be willing if you contact them and ask them to report your payment history on your behalf. Having an electric, wireless or water service account in good standing won’t establish your credit score on its own, but can be helpful for first-time borrowers, since it shows lenders you’re a responsible person who pays their bills on time. Keep in mind, though – the reverse is also true. Even if a utility doesn’t report on positive payments, if a bill becomes overdue and goes to collections, there’s a good chance it will land on your budding credit report as a negative.

These are some good first steps, but if that’s still not enough, here are a few other things to consider. Some banks offer credit cards for folks who want to establish, strengthen or even rebuild their credit. It’s called a secured credit card, because you secure the amount you borrow with a security deposit. In other words, you provide collateral, something the lender gets to keep should you default on the loan, by depositing money in an account with the bank. Your credit line is equal to the amount you deposit. You won’t be able to touch that money, or use it to pay off your balance, and you’ll still have to prove to the bank that you have sufficient income to pay the credit card. The good news is that the bank will be more confident that you’ll pay them back, even without great credit, allowing you to build or rebuild your credit. Since you’ll be using your first card to build your credit, you’ll want to make sure that once active, your lender will report all those on-time payments to the bureaus before you apply. Most banks and credit unions do this, but some retail store cards, for example, don’t. If this isn’t the case, that the payment history isn’t reported, you may want to keep shopping for a card.

Also, don’t apply for a bunch of different cards if you keep striking out. All those hard inquiries and declines aren’t going to help you build a score. Keep in mind – a secured card is different from a prepaid card. A prepaid card allows you to load the card with a cash amount ahead of time to spend later. Prepaid cards are great for people who need a Visa or MasterCard to make a purchase, and can be a terrific gift idea, but they won’t help establish credit.

Another way to build credit is to see if there’s someone who might be willing to co-sign a loan with you, for example, your parents or spouse. When someone co-signs a loan, you get the benefit of their good credit history, and this may help you get approved. You can then build your own credit with a good history of payment on the co-signed account. Now, whoever co-signs the loan for you is taking on a really big financial responsibility. They’ll be on the hook for the debt if you run into trouble, so it’s not something you should ask for lightly.

When you do get credit extended to you, it’s important to keep managing it carefully, even after you’ve built a history. You’re doing the right thing by getting off on the right foot.

Now, make sure you keep those good habits the rest of your credit life. There are some additional videos here that will keep you on the straight and narrow when it comes to building out a long, positive credit history, and that will eventually result in a really good credit score.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.

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