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Recently, a reader named John emailed for advice on building credit from scratch:

“I am 29 years old, I have no debt (never liked debt, pay with debit for everything) and I have never had a credit card. The result is I don’t think I have a FICO credit score, or at least Credit Karma wasn’t able to give me one. This hasn’t hurt me in the past as I have had no need to buy a house, and I’ve paid cash for my cars. Though I suspect someday that may change and I would like to begin improving my score now for when that day comes.

My question is – what should I do about getting a credit card? I had considered getting something with a high rewards program and just making sure I pay if off every month. Paying for what I normally use my debit card for with the credit card (Gas, groceries, food, etc). But listening to some of these podcasts it sounds like I want to keep my utilization low, which I’m not sure I fully understand. Would I be better off getting multiple cards and only using a small % of each (paying off each month of course)? Or is it fine to replace all purchases on a debit with a credit card? Or is there some other solution? Clearly it seems the best way to improve a score is to pay bills/debts on time, but do I need to open credit cards to do this?”

First of all, John is right to worry about the fact that he lacks a FICO score, at least in Credit Karma’s eyes. Although he hasn’t had to use credit in the past, chances are good that he will need to in the future. If John ever decides to buy a home, take out a loan to start a business, or borrow money for any other reason, his nonexistent credit history will likely preclude him from doing so.

With that being said, John is at least on the right track. Even though he is debt-averse, he knows that he may need credit sometime in the future. So yes, John, you should definitely get a credit card – and you should get one sooner rather than later.

How Your Credit Score is Determined

Now that you know a credit card should definitely be on the agenda, it’s important to understand why. A basic understanding of how credit scores, and specifically FICO scores, are determined can help achieve that goal.

Many credit card issuers and banks use FICO scores to determine creditworthiness and suitability for a loan. When you look at how FICO scores are figured, it’s easy to see why John’s overall lack of credit has resulted in no credit history – and worse – no FICO score.

The Anatomy of a FICO Score:

  • Payment History: 35%
  • Amounts Owed: 30%
  • Length of Credit History: 15%
  • New Credit: 10%
  • Types of Credit: 10%

As you can see, FICO scores are decided based on your real credit history – how often you pay your bill on time, how much you owe in relation to your credit limits and income, and the length of your credit report. In John’s case, the fact that he is debt-free does nothing to help him. Worse than having a bad credit score or negative marks on his credit history, he has no credit history at all.

5 Steps You Can Take to Build Credit from Scratch

Like anyone with no credit history, John needs to build his credit from the scratch. Although this can be a difficult task, it can definitely be done. After all, this is how everyone starts – and the only way is up. Here are five steps anyone can take to build credit from the ground up.

Step 1: Ask to become an authorized user on a family member’s credit card.

If you can’t get a credit card on your own, becoming an authorized user on a family member’s account is one way to begin the process of establishing credit. This strategy works best when you have a parent or family member is able to help you out, but could easily backfire if the person you’re relying on misses a payment or uses credit irresponsibly otherwise. If you go this route, take special care to make sure your authorized user status is a benefit, not a detriment.

Step 2: Get a secured credit card.

If you can’t become an authorized user on someone’s credit card for any reason, you may want to consider applying for a secured credit card. Unlike unsecured cards which actually extend credit, secured cards require a deposit as collateral. In many cases, your credit card limit will be low and on par with your deposit – usually in the $300 -$500 range. Although a secured card isn’t always ideal, it is sometimes the best way to build credit from thin air. Just make sure to watch out for high or unreasonable fees.

Step 3: Try a retail credit card.

Although secured credit cards are usually the easiest cards to qualify for when you have no credit history, retail credit cards are right behind them. Offered by individual stores and the banks that back them, retail credit cards offer low credit limits that are difficult to abuse. These cards generally carry higher interest rates than almost all others, however, which is just another reason to pay your balance in full each month.

Step 4: Take out a loan with your local bank.

Even though you don’t have a credit history, you’ve probably been working with a local bank for some time. If you have a relationship with one, you might be able to use it – along with a stable work history – to take out a loan. Next time you’re ready to pay for a large purchase in cash, apply for a loan with your local bank instead. Then pay it off slowly over several months, even if the strategy results in money lost to interest payments. Sometimes paying interest is unavoidable if you want to prove you can use credit responsibly.

Step 5: Pay all of your bills on time, every time.

Once you’ve gotten a line of credit in your name, whether as an authorized user or with the help of a secured card, it is essential that you pay all of your bills on time, every time. Meanwhile, you should also take special care to pay all regular bills in your name on time, including cell phone bills, utility bills, or rent payments. One false move could mean a negative mark on your credit report, which is the last thing you need as you work to build credit from scratch. If you’re worried about paying late, set a reminder on your phone or mark your calendar. Although keeping up with bills can be a pain, you truly cannot afford not to.

Once you take the appropriate steps, you should try your best to be patient. Building credit takes time, and that’s especially true when you start with nothing. Fortunately, it shouldn’t take long to build a credit history that will be on your side if you ever need to borrow money for a home or a car, or if you simply want to be a co-signer on your children’s student loans.

It may not seem important now, but as John is beginning to realize, one day it likely will be.

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Article comments

Joe says:

I feel this is bad advice. Could he apply for a manually underwritten loan from a local bank if he needs to get a mortgage in the future? Why pay money on interest from a loan from a bank for a large purchase when he has made it to the age of 29 without a FICO score? I feel this score is often very overrated and misused.

Sudarto says:

Secured credit card can be the best choice. Find the easiest application to the credit card with a deposit that is not great.

We need spending does not exceed the credit limit. After that, we pay the monthly bills on time.

This will allow us to get a high credit score. With high credit score, we can immediately get a regular credit card. Here, we need to choose a credit card for a small fee, low interest rates, but provide cash back and reward.

I feel getting a credit card to build your score may be bad advice. You made it this far without one why start now? I feel paying interest isn’t the way to go. Right now FICO is working on a new score for the folks who don’t use debt and have no score. Soon you will have a score based on items like rent payment, utility payments and etc.

Heather says:

I really think it’s totally a stupid idea in fact to tell people to cause debt to gain more debt. I have the same issue here where I am 31 and have had some minor things on my credit such as student loans and medical bills. However both of which I have paid on time. I have never and will never trust a bank with my money ever again as I was once burned. I even have my house on land contract and have paid cash for the majority of the vehicles I have owned in my lifetime. Which is only four total. I think our society needs to come up with a better way of finding out about ones character and how willing they will be to pay something back both fully and on time than coming up with scores to deter low income people from trying to get help. Because I have watched my mother go through a vehicle repossession and a foreclosure on her house all because of the loss of her job I do not want to get a mortgage and rely on some computer at a bank that doesn’t know the person behind the loan and can be compassionate when rough times come. I am now in the position to get a mortgage and am being told left and right to get a credit card. I just really think that more Americans should come together against big banks and tell them that people that take care of their bills personally don’t always need a score to tell them its okay to lend to us.