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Where Do I Start? How to Build Credit if You Don’t Have a Credit Score

Learn the options for starting to build credit and the best strategies for maintaining a high credit score over time.

Author: Abby Butkus

February 28, 2023|Blog

Where Do I Start? How to Build Credit if You Don’t Have a Credit Score hero image

Lenders: Getting a small line of credit will help you build your credit history.

Also Lenders: You don’t have enough credit history for us to give you a line of credit.

Heard that one before? It’s an unfortunate truth that in order to build credit, you must have credit. As a newbie, this can be frustrating. As you reach new milestones in life such as buying a house or upgrading to a nicer car, it’s a reality that credit, and good credit at that, is essential. But, there’s good news! You’ve got plenty of options to start building your credit early so you’re prepared for those bigger money moves down the road.

Ways to Start Building Credit Today

Start Counting Your Utility, Rent & Cell Phone Bills

Are you paying for your cell phone bill, utilities, and rent on time? Great! Take advantage of your good track record and apply them to your credit report. In many cases, you can request that your landlord or your utilities company report your on-time payments to the credit bureaus.

Become an Authorized User

Another option to start building credit is to become an authorized user on a family, friend, or significant other’s credit card. Jump on your favorite person’s bandwagon and as a result establish your own credit card history… but be careful of the risks. You need to be 100% confident that the account holder is a responsible credit card holder, meaning they always pay on time and practice responsible spending habits. If the account holder doesn’t pay on time, that could actually tank your credit score – ouch. We want you to come out of this as two peas in a pod, not two peas in debt.

Open a Store Card

Opt-in for the credit card of a store you shop at frequently and make one purchase per month on the card – and pay it off immediately. Store cards are generally easier to qualify for over traditional credit cards, especially if you don’t have a long credit history. It’s important to note that these types of cards typically charge higher interest rates in comparison, so be sure that this store aligns with your financial goals and that you pay off the balance each month to avoid any negative repercussions. 

Get a Secured Credit Card

Secured Credit Cards are an excellent way to start building credit. They are called “secured” for the initial deposit you pay upfront to “secure” the credit line. Typically, the amount you deposit is equal to the amount of credit you will receive, i.e. if you choose to deposit $300 to open the account then you have a $300 limit. Bonus: once you establish a positive payment history you can receive your deposit back (but check the fine print before you open the card!) and have the option to increase your limit or upgrade to an unsecured, traditional credit card. 

Apply for the Arro Card

We realize that there may still be barriers to begin building credit with any of these options, which is why we offer our members a traditional credit card (no security deposit!) without a hard inquiry on your credit report. Arro uses alternative data such as income to assess eligibility in order to uphold a more inclusive and fair vetting process. All you need to qualify is a Social Security Number or ITIN, a valid checking account with a U.S. bank, and to be at least 18 years old. Not bad, huh? 

Things to Watch Out for When Building Your Credit Score 

Hard vs. Soft Credit Credit Inquiries

Hard Credit Card Inquiries occur when you apply for a credit card or a loan. Creditors request to look at your credit file to determine how risky you are as a borrower and these ‘inquiries’ are recorded on your report. While they only stay on your report for two years, too many inquiries may affect your report negatively. It also looks incredibly sneaky as you might be seeking several loans and cards that you don’t have means to actually pay back.

Now, you won’t need to spend too much time worrying about Soft Credit Card Inquiries such as when insurance companies, landlords, employers or you pull your credit report. These will not affect your credit score. Arro also only makes a soft credit inquiry so your application doesn’t hurt your credit score. In summary, be strategic about comparing rates on financial services and opening too many accounts at once as these would both produce multiple inquiries on your report and ultimately result in a dip in your score. 

Paying Off Your Balance

The top priority once you receive your line of credit is to pay off your balance in full and on time each month. If you carry over a balance from month to month the interest charges will multiply and can leave you in a bind. Consider automated payments or setting up alerts to ensure you don’t forget to pay it off each month.

Credit Card Utilization

When it comes to credit card utilization, the lower the better. You might be wondering why the bureaus care. Well, utilization refers to the amount of credit you have available in relation to how much you’re using each month. If you are maxing out your credit limit each month it can look risky to the bureau. Therefore, a good rule of thumb is 30%. For example, if you have a $1,000 credit limit and you use around $300 each month then that is roughly a 30% utilization rate. Credit card utilization can also be a handy tool to increase your credit score quickly too – pay down any balances on your credit card regularly and watch your score grow. 

Free Annual Credit Report

Ignorance is not bliss when it comes to your credit. You can utilize free tools to monitor your credit report’s health and dispute any potential errors that could negatively impact your score (and it also allows you to keep an eye out for fraudulent activity). All three Credit Reporting Agencies grant one free credit report a year. Therefore, if you are strategic about it you can space out your credit report requests throughout the year to avoid paying to check your score.

But, Do I Really Need to Start Building Credit Now? 

The reality is that many big life moments call for a credit report: landlords will run a soft credit inquiry to determine if you are eligible for leasing and what you will owe for a security deposit (it goes up without it or you cannot lease at all!). Also, lenders will run a credit check if you need an auto loan – if you don’t have a credit score then you will owe a higher interest rate… yikes! Therefore, the best day to start building your credit is yesterday, and the second best day to start is today. 

And once you do get started, remember: building credit from scratch takes time, so be patient and just keep doing the right things:

  1. Pay off your balance each month 

  2. Don’t apply for credit you don’t need

  3. Keep your credit utilization low 

  4. Check your credit score on regular basis 

That’s it! Do those four things and consider yourself well on your way to achieving your financial goals as well as a healthy credit score. If you are ready to get started on that journey, then join Arro’s waitlist.