No Credit? Don’t Sweat It. Here’s How to Build It From Scratch

 Everyone loves a bargain. But what if there was a way to save huge on upcoming big-ticket expenses like a car payment and mortgage?
Look no further than a solid-gold credit rating. With an excellent score, you can qualify for better interest rates, saving you literally tens of thousands in interest payments over your lifetime.
There’s just one snag: On the whole, those under 35 use credit a lot less than those over 35, says Pam Wilson, head of financial coaching for Guidewell Financial Solutions. Less credit history means less opportunity to nab a top rating.
Sound familiar? Here’s how to fix that.
Start with a clean slate
Your first step is to make sure your credit report is squeaky clean. You may have negative information that doesn’t belong to you, something that could happen if, for example, a person whose Social Security number is one digit different than yours has a delinquent debt that mistakenly shows up on your report, says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. (The FTC found that one in four consumers has found errors on their credit reports that can affect their score.)
Scan your reports from all three credit bureaus (TransUnion, Equifax and Experian) via Annualcreditreport.com. It’s free once every 12 months from each agency. If you spot a mistake, dispute it with the credit agency as soon as possible.
Apply for an entry-level credit card
A good place to start is with your bank or credit union, but you can also search online for the best cards for those with no or low credit—and look for those with no annual fee. It’s likely to have a low limit and high interest rate. After all, as McClary points out, without credit history, lenders don’t know if you’ll pay your bills on time—or at all. Just remember that you won’t have to rely on an entry-level card forever. It just gets you on the board.
Having trouble finding a lender? Look into secured credit cards, which require a deposit equal to your credit line. Because the bank has your cash as collateral, these cards are generally easy to qualify for, regardless of your credit history. Just remember that it’s not the same as a prepaid card—you still have to pay for charges each month.
You can also ask a family member or partner if you can become an authorized user on their credit card, or if they’ll cosign a new account for you. Just make sure you trust your cosigner to handle credit responsibly (and do the same, of course).
Establish good habits
Once you’ve got credit, pay your bills on time every time. Timely payments account for 35 percent of your credit score, with all other categories, such as percent of credit used and length of credit history, accounting for less. McClary cautions that even a minor slip as you’re building credit can cause your score to drop substantially because you don’t have other accounts to offset a misstep.
Paying your balance in full each month not only ensures that you won’t pay hefty interest charges, but also that your utilization ratio—or the amount of credit used compared to your limit—remains under 30 percent, which is where you want it to stay. A two-year cycle of timely payments is a solid benchmark for when you can expect more attractive credit offers to come your way, McClary says.
Diversify
While you’re climbing the credit ladder, you may want to diversify your lines of credit by applying for another credit card—while maintaining your good habits, of course. But don’t close your older account, even if you stop using it. Closing your first card could hurt your credit history by shortening it.
Check in on your progress
Looking at your credit report for a snapshot of your progress—and to ensure new mistakes haven’t popped up—is key to maintaining the good credit you’ve built. To check your credit score, too, contact each of the reporting agencies, which will supply it for $8 to $12, McClary says, or take a peek for free at a site like CreditKarma. You also could look into one of the many credit cards from major issuers, like Citi and Capital One, that offer a monthly credit score update as a cardholder benefit.