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How to Build Good Credit From No Credit

Executive Summary

When you commit to improving your credit score, it can feel like a game of Jenga. One wrong move and the tower could come crumbling down. Through the story of his debtless intern, Certified Financial Planner and author of Soldier of Finance Jeff Rose shows how to build good credit even if you have no credit to start with.

  • It seems responsible to live life without debt. If you plan on using loans to buy a house or car, however, demonstrating that you can pay the debt you accrue is just part of the deal.
  • Rose suggests four strategies for using a credit card to build good credit, which include considering secured cards and charging items to it consistently.  
  • Within a matter of months after using his credit card, Rose’s intern was able to establish enough credit to achieve his goal of buying a car.

One of the hardest aspects of building good credit is the fact that high debt lowers your credit score, but so does no debt. I had an intern recently who was ready to graduate from college debt free. He had no credit cards, which was good, but he also had no credit.

We were talking one day about his financial prospects, and as a matter of course, I asked him, “What is your credit score?” “I don’t know,” he replied. That’s not unusual. Most people don’t know, and he had never applied for anything that required checking his score. But since I asked, we decided to run a free check. His score was a very low 621. Since anything under 650 is considered bad credit, we felt that we should take a look at it.


This kid had been completely dependable and responsible about his finances, yet his credit score was horrible. His parents had advised him not to get a credit card, and he followed their advice. Unfortunately, if you don’t use credit, you can’t establish a credit history. A decent credit score requires that you demonstrate you have handled credit in the past. There must be a record of making payments. A good credit score results from showing that you can incur debt and be responsible for paying it off on time.


The reality is, as my intern’s story illustrates, you must use credit in order to have credit. It’s not the fact you use credit cards that causes problems; it’s how you use them. Maximize the benefit of your cards by understanding what affects your credit score. Here are a few guidelines that should help you make decisions:

  • Get the right cards. If you have no credit at all, cards from department stores and gas companies are not the best way to get started. In fact, they might be hurting your credit score. Cards are not all created equal. To achieve the highest credit scores, you need to use the biggest cards: Visa, MasterCard, Discover, or American Express. Department store and subprime cards—cards issued to those with substandard credit scores—carry the highest interest rates, making them the most expensive to maintain, plus they have frequent incentives to use them. If you are a shopaholic, this is a dangerous position to put yourself in.

Additionally, every time you open a new card, you add a credit inquiry to your credit report, which lowers your score. Department store card limits are usually lower, which makes it more difficult to maintain a good utilization ratio, as explained later in this section. You will always be better off if you stick with the major cards. If you don’t qualify for one of those cards, consider starting with a secured card, as my intern did. You can find options at a number of sites, such as,,, and Make sure the site you choose reports to the three big credit bureaus, and request secured cards that can be converted to regular credit cards after a year or two of on-time payments.

  • Limit the number of cards. There is a ratio of how much credit limit you have to how much debt you have. Cards sitting idle don’t help your numbers. Don’t cancel them, however; keep making payments and stop using them until they go inactive. If you do decide to close them, don’t do it all at once. Closing a large amount of credit cards could also hurt your credit. You should have at least three lines of credit for the best scores. Any less than that,and the credit bureaus won’t have enough information about your spending habits to form an accurate judgment. Conversely, if you have more than five cards, credit bureaus will figure you have more opportunities to overextend yourself,and are more likely to lower your score. Besides, the more cards you have, the greater the chance that errors will find their way onto your credit report.


  • Be aware of your utilization ratio. That’s a fancy term to describe how much you use your cards. More than a third of your credit score is determined by the amount of credit available to you that you don’t use. The more unused available credit you have, the better your credit score will be. You should always try to keep your balance below 30 percent of a card’s limit. It’s even better if you can keep it below 10 percent. Be aware that your utilization ratio is computed even if you pay off the entire balance each month. The balance reported to the credit bureau is usually whatever amount was on your last statement; if you pay off the total balance each time you get a bill, you must still be cautious not to charge more than 30 percent of the card’s limit.


  • Don’t let the card sit idle. While using your card too much is unfavorable, it is unwise to never use them. Optimal use is to keep your card activity low and pay off the balance each month,so that you don’t end up paying a ton of interest. You don’t have to carry a large balance in order to use credit.


Luckily, my intern learned early the implications of forgoing credit cards. Equipped with new knowledge about how to build good credit with a credit card, he realized that he wouldn’t have to sacrifice his responsible approach to his finances. But that didn’t mean opening a credit card would be easy.

His first attempt to secure a credit card was rejected. He approached a couple of banks, and after he told them he was unemployed and had no credit history, they laughed at him. One of the banks that denied him offered good advice that set him on the right track. First, they told him to stop applying for credit. Every time a credit check had been run, it lowered his credit score. Part of the credit bureau calculation is the number of credit checks run.

He then applied for a secured credit card. There are numerous options for this. In his case, it was a card offered through Capital One. The terms of the card are heavily weighted in favor of the lender, but it allowed him to establish credit. A secured card works similarly to a regular card, except you give the lender a deposit, which is held as a guarantee for payments on any credit card purchases. The amount of the deposit sets the limit of the card. Most of them add an annual fee, in this case $34, for maintaining the card. In the eyes of credit bureaus, the secured card is treated exactly as any other credit card. The card worked.

He was very careful to only use the card to purchase things for which he had money. Opening the account with a limit of $1,000, he used it regularly for purchases from soft drinks to airline tickets, and paid off the balance each month religiously. After just five months, he decided to buy a car. With the original credit score of 621, he would have either been denied a car loan or ended up with an interest rate of more than 9%. But in that short time, his score had gone up 110 points to 731. Instead of rejecting him, they approved the loan at a rate of 3.99%.

Adapted with permission from Soldier of Finance by Jeff Rose, copyright Jeff Rose.

Bring It Home

When I was 18, I applied for my first credit card. My mom cosigned for it, which allowed me to form a solid foundation for my finances throughout college. I remember the first time I held it. My hands felt like I was hovering them too close to a fire. Sure, I had power over the card, but I also recognized the power it had over me. The best method for mitigating its influence was gaining a literacy around credit cards and how each purchase impacted my credit score. What strategies have you tried to improve your credit score? Which ways proved successful, and which should you have tossed in the can? Give us your advice below! - HarperCollins Leadership Essentials

Jeff Rose

Jeff is a Certified Financial Planner™ professional, CEO and Founder of Alliance Wealth Management, LLC, an investment advisory firm. He is also an Iraqi combat veteran having served in the Army National Guard for 9 years, including a 16 month deployment to Iraq in 2005.

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