Building Credit from Scratch

A good credit history is needed to snag the best rates on home and auto loans, credit cards, retail store accounts, car insurance and, in some cases, can determine whether you’re able to secure employment. And a lack of credit history may mean more up-front costs on everyday purchases and services. For example, without a history of good credit, you can expect to pay a security deposit for utilities and cell service.

So, how do you establish credit when you’re just starting out? The one thing you do not want to do is complete every application under the sun hoping you’ll be approved - eventually. Too many credit applications can hurt your credit regardless of your level of credit experience.

Your credit score, which is a numeric reflection of your credit history, is also influenced by your:

• Payment history – Whether payments are made on time.
• Credit account balances – How much of your credit is used in relation to the available amount. We recommend keeping the balance to no more than 30% of the available credit.
• Age of credit accounts – Accounts with a two-year history of on-time payments are likely to add more to your score than an account with two months of on-time payments.
• Variety of credit accounts – Maintain both revolving and installment accounts to demonstrate your ability to handle different credit obligations. Loans are considered installment accounts while credit cards are considered revolving accounts.

Here are two great ways to build credit from scratch.

Apply for a Secured Credit Card

Credit cards are issued as secured or unsecured. Secured credit cards require a deposit to a linked savings account that matches the credit limit. For example, if your secured credit card deposit is equal to $350, then your credit limit will be $350. The security deposit is from your personal funds and acts as a form of insurance on the card if nonpayment occurs.

Unsecured credit cards do not have security deposit requirements, but approvals are often based on factors tied to your credit history, debt load and income.  

Secured cards are used the same as unsecured cards and are a great way to build your credit from scratch. “A secured credit card reports to all three credit bureaus just like a regular credit card would. It’s not classified as a secured credit card so paying regularly and on time can make a big difference in your (credit) score,” says Hughes business representative, Dani Durnal.

Apply for a Credit Builder Loan

Similar to a secured credit card, a deposit is made to a separate account to initiate the loan. The difference is that the credit union makes the deposit into the account and you make payments towards the secured loan deposit. For example, if you are approved for a $1000 secured loan, you’ll need to make monthly payments of $50 until $1000 has been applied to the account. Once the secured loan amount is paid in full, you receive the loan plus any interest earned on the deposit.

Your payments are reported to the major credit bureaus. Hughes Federal Credit Union offers a variety of credit builder loans based on your needs.

Remember to use credit wisely by paying your bills on time and keeping balances low. It takes time to build your credit history, but the financial rewards are worth it. Interested in taking steps to build your credit today? Contact a Hughes representative to discuss secured credit options.