What is a credit score?

Understanding what makes up a credit score is essential to growing your credit. It's a 3-digit number ranging from 300-850 that reflects the information provided by the three credit bureaus that collect data from your lenders every month.

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Your credit report includes your payment history, how much you owe, your credit limits, how long you've been using credit, and how many times you've applied for credit. 

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The higher your score, the more likely you will qualify for financial services and receive lower interest rates, more favorable terms, and higher credit limits. In short, a higher credit score can save you money.

Ways to build credit from scratch

Apply for a secured credit card

You can start with a secured credit card if you don't have a good enough credit score to qualify for a traditional credit card. Secured cards are backed by cash deposits, which then become your credit limit. These deposits are refundable when you close the account. 

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Aside from having to supply the upfront cash balance, the card works like any other traditional credit card. You use it to make purchases and are responsible for paying the balance and incurring interest. 

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The purpose of a secured card is to prove your responsibility with credit, so it is vital to pay the balance on time and in full each month. As your credit improves, you'll be eligible for an unsecured card. 

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When shopping for a secured card, look for low annual fees and interest rates. Also, be on the lookout for one that reports to all three credit reporting agencies — Equifax, Experian, and TransUnion — so your credit report will reflect your history of responsibility. You can find out more about each company's credit reporting practices online or by calling the credit card company.

Get a credit-builder loan

Consider a credit-builder loan if you need more credit history to qualify for a loan. Credit unions and community banks typically offer credit-builder loans to help people build their credit. 

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Credit-builder loans work differently from traditional loans. When you apply for a credit-builder loan, you may pay a small administrative fee. Once approved for a loan, which typically ranges from $300-$1000, the bank will open a savings account in the amount of the loan. Then, you'll make loan and interest payments to the bank — usually over 6 to 24 months. Once the loan is paid in full, you can withdraw the funds. 

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The banks report your payment history and balance to the credit reporting bureaus to help build your credit history. A solid credit-builder loan will offer low origination fees and report to all three credit bureaus. 

Become an authorized user

Asking a responsible close friend or family member to add you as an authorized user on their credit card account can significantly help your credit. As an authorized user, all activity on the card — credit balance, limit, and payment history — is reported on your credit report. Doing so can decrease the time it takes to build credit from scratch. 

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However, be aware that if the primary cardholder misses a payment, this will also appear on your credit report. Additionally, if the account has a high utilization rate, it can hurt your credit score. 

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Once you are no longer an authorized user, the account's history will be removed from your credit report. Therefore, it's beneficial to use this time to achieve a credit score that will allow you to apply for your credit card. 

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Becoming an authorized user isn't necessarily a surefire strategy for improving your credit. Credit bureaus have begun to recognize this as a credit improvement tactic and may choose to avoid acknowledging it on your credit history.

Get credit for utility and rent payments

When the only bills you pay are your phone, utility, and rent payments — and you’re making them on time, without fail — you can leverage that diligence right onto your credit report. 

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Through rent-reporting services like Rental Kharma and LevelCredit, you can add rent payments to your credit report to build a healthy credit score. However, be aware that each company has different fees and reporting practices. For example, Rental Kharma charges an enrollment fee and a monthly fee and currently reports to TransUnion; they are in the final stages of adding Equifax. LevelCredit requires a monthly fee and reports to all three credit bureaus.

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For utility and telecom bills, Experian Boost offers a free opt-in service that scans your bank account for utility payments, then allows you to choose the bills that get reported to Experian.