How to Get Credit From Scratch

Millions of adults in the U.S. are considered “credit invisible," meaning they don't have enough credit history to have a credit report or credit score. In fact, 19% of American adults do not have a credit score; this is made up of 28 million adults who are credit invisible, and 21 million who are unscorable.[1]

Living without a credit history can be detrimental to achieving future goals such as buying a car, purchasing a home, or getting a job. Your credit report is not just a record of your credit cards and loans, it is a snapshot of your creditworthiness to potential lenders, employers, and landlords.

Credit scores are determined by information contained in reports at the three major credit bureaus in the U.S., Experian, Equifax, and TransUnion. They can provide you with a FICO® credit score and a VantageScore®, two types of credit scores that vary slightly depending on different factors.

These major credit bureaus receive information from lenders/creditors which include for example: payment history, credit limits, and date of accounts opening. They use this information to create credit reports which are records of how you have used credit in the past and help future lenders/creditors assess your past financial behavior to predict your future financial behavior.

Without a credit score, you may be required to pay higher interest rates, insurance premiums or deposits, or worse, you may be denied altogether.

Who checks your credit score?

While banks, financial institutions, credit card companies, etc., check your credit history and credit score to determine whether you qualify for products such as loans and credit cards, they're not the only people pulling your credit.

Insurance companies often check insurance-based credit scores to determine your premiums. Landlords may check your credit before approving a lease or to determine what deposit you need to put down.

Service providers like electric companies, water companies, or cell phone providers may also check credit reports to determine whether or not to require a deposit.

Even some employers are checking credit these days — especially in occupations that require handling money — to determine financial trustworthiness.

The credit catch-22

If you don't have credit and you're trying to build it, it can feel like a Catch-22. To be approved for credit, companies first want to see that you’re trustworthy before offering you a loan or credit card. However, you need a credit history to get approved in the first place.

So how can I get credit if I have no credit? If credit card companies and banks need your credit history to give you credit, is it even possible for someone with no credit history to get credit? YES! There are a few ways that you can begin establishing credit if you don't have a credit score or credit report.

How to get credit with no credit history

There are a couple of options for someone with no or little credit to consider. Each option has various pros and cons, so it’s important to look for the option that best fits your needs.

And remember, building credit takes time and perseverance. There is no quick way to build new credit or repair credit that has been damaged. It’s important to establish and maintain healthy financial habits like making on-time payments and not overspending or creating too much debt when using a credit card or other forms of credit.

So you want to know how to get credit and start building your credit score? Here are a few options.

Option 1: Become an authorized user

A good way to get credit is to become an authorized user on someone else’s credit card. This is also known as piggybacking credit. Whether this is a parent or a close family friend, it should be a mutual agreement with clear expectations. You should always abide by the expectations given to you by the credit card owner and should view yourself as a guest in their credit house. Respect the credit and use it as you are allowed.

Being an authorized user on someone else’s credit card helps you build up your own credit, and shows lenders that someone else has trusted you with their credit. If you need to start building your credit from scratch, being an authorized user can be a great place to start. It helps build your credit quicker because of the positive credit history that the primary cardholder already has in place, especially if it’s a card that has been in use for several years. It also helps track family spending if it’s being used alongside a family member. But be aware, if the primary cardholder doesn’t make repayments on time, this could negatively affect your credit as an authorized user.

Option 2: Get a secured credit card

A secured credit card works similarly to a regular credit card: there is a maximum credit limit, you may spend up to that limit, and you make monthly payments. However, unlike a regular credit card, secured credit cards require an up-front deposit.

When applying for a regular credit card, lenders use a borrower’s credit history to determine approval and interest rates. Secured cards, on the other hand, are designed for people who lack credit history and use the initial deposit to mitigate potential risks.

The advantage of a secured card is immediate access to a credit card with a line of credit without the need for a hard credit check with some issuers. You can also use the credit card as needed but be aware that carrying a monthly balance will add on the unwanted high interest fees. The disadvantage of a secure card is that a cash deposit is required and interest rates are generally very high.[2] Your credit limit is usually dependent on your cash-secured deposit amount.

Those looking to get credit for the first time may have a credit limit equal to the deposit amount. If you have extra cash savings available — usually $200 and up — then a secured credit card may be worth looking into. See more about using secured credit cards to build credit and the secured Self Visa® credit card.

Option 3: Get a secured loan

A secured loan is money you borrow that is secured against an asset you own. These loans require a deposit and/or some sort of collateral, such as your car or home, to be approved. These pieces of collateral offer assurance to banks that you will repay the loan. However, it’s important to understand how these loans work, as failure to repay could lead to the bank seizing your assets.

The loan will offer one amount, and you will repay this amount over a set period of time. If you know how much you need to borrow and have a source of collateral that the lending bank approves, a secured loan may be an option. Keep in mind that with a limited credit history or no credit score, it still may be difficult to qualify for an auto loan or home mortgage. You may need a cosigner.

Other factors like debt-to-income ratio (DTI), which is defined as your monthly debt payments divided by your gross monthly income affect how likely you are to be approved, so it’s important to consider this. Note that the higher your DTI, the more difficult it will be to get approved. Try to maintain your DTI at 35% or lower so you can have a better chance at getting the loan you’ve requested.

Option 4: Get a credit builder loan

These loans are lesser known but can offer the same credit building advantages as a term loan such as an auto loan or a credit line such as a credit card. In the past, credit builder loans were typically offered through credit unions or small, local banks and required a large initial deposit.

Self offers credit builder accounts that are secured loans, however, they are not secured with collateral from the borrower (as in a secured loan above). Instead, the loan is placed into an FDIC-insured Certificate of Deposit (CD) account. The borrower then makes monthly payments toward the loan over a defined monthly period. At the end of the loan term, the CD account unlocks and the borrower receives the funds (minus interest and fees). Self reports each payment to Equifax, Transunion and Experian credit reporting bureaus every month.

Self’s credit builder accounts do not require a hard credit inquiry or credit score.

Sources

[1] Experian - Credit Invisible and Unscorable Americans - https://www.experianplc.com/media/latest-news/2022/experian-and-oliver-wyman-find-expanded-data-and-advanced-analytics-can-improve-access-to-credit-for-nearly-50-million-credit-invisible-and-unscoreable-americans/
[2] Bankrate - Secured Credit Cards - https://www.bankrate.com/finance/credit-cards/secured/