Tuesday, July 16, 2024

How to Build Credit if You Have None (or Worse!)

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The other day, I was watching CNN. There was a report stating that 40 percent of Americans do not have $400 saved for emergencies.

I can’t say it’s shocking—so many of us are living paycheck to paycheck with no credit—or even bad credit.

Having a savings account (and stashing money in it!) is absolutely imperative. But almost equally as important is knowing how to build credit.

Most Americans’ Finances Are in Shambles

Full disclosure: I am not a finance guru. But I do know the basic concept of finance, that being you have to make more than you spend.

If you make $4,000 a month, you need to spend $4,000 or less a month. This is simple mathematics. Yet too many of us know little to nothing when it comes to financial literacy.

This lack of education has created a cycle of debt in many of our lives. A lot of us are under the impression that, if only we made more money, we would be happy and we would be able to get back on track financially.

But something strange often happens when a person makes more money. They end up spending more money; rarely do they save it instead. This only perpetuates the cycle of debt among Americans.

So, what is the solution? I’ll get to that in a moment. Let’s just say it’s easy in theory but difficult in terms of application.

Before I get into it, I would like to validate why I’m qualified to write on this topic.

I have been there! I’ve lived the life where it seems like you have more month than money.

I’ve been through the whole creating a budget at the beginning of the month, and that budget just ends up making things look even more discouraging. It clearly shows you don’t have enough money; you won’t make it through the end of the month.

When this happens, we tend to give up and quit instead of making an attempt to remedy the situation.

In my late 20s and early 30s, I was broke. I mean dead broke. I was so broke that I was budgeting the amount of overdraw fees I could incur for each pay period.

And this was not because I was a massive spender or immature with my money. This was a period of sacrifice I had to go through because I was building a business. It was compounded by a few unfortunate circumstances, too.

I was never a big spender on credit cards. And I didn’t write bad checks or anything like that.

There were two specific things I needed to do to fix my situation: be more conscientious about my spending and become more disciplined.

Young women worried about bills and debr stacking up. Unable to pay credit cards and loans

Related: Why Credit Scores Matter & How to Improve Them

How to Get Out of Debt

Let’s start by talking a little bit about psychology.

First off, some of us are too concerned about money. We take it too seriously. Some of us believe it’s the be-all and end-all, which is simply not true.

I used to say all the time, “I gotta go get this money!”

See, I was a hustler. I loved to start with something at the beginning of the day and try to increase what I had by the end of the day—a true barter system.

This was a challenge for me, but more importantly, it was fun! I loved to see daily progress. But if I could not produce, I would beat myself up.

I didn’t have a 9 to 5. I truly lived off the connections I made.

If I didn’t make enough connections to produce tangible results, I had an unproductive day, which might lead to an unproductive week. That allowed for the possibility of an unproductive month. A few unproductive months meant discouragement—and depression.

The reason I mentioned the psychology behind money is because we let money dictate to us what we can and cannot do. But why?

Money is just another resource—albeit a needed resource—but not the most important resource. Those happen to be time and relationships.

Once we learn how to leverage time and relationships correctly, and tie it to our purpose, then we will have more than enough money.

So, stop working just for money. Instead start building quality relationships and leverage your time correctly. Focus on your passion, your purpose. Then, you will see things start to change in your life.

Now, let’s dig into this credit thing. I will explain how to fix or establish your credit plainly and simply, but again, the application is the difficult part.

What is Credit Anyway?

First off, what is credit?  This is very simple: it’s essentially a good name.

Sure, there are technical definitions chock full of jargon. But it boils down to can I trust you? Will you do what you say you will do?

I believe that is easy enough to understand, but people don’t look at it that way. It’s just integrity.

If you sign a lease for a car, the dealer wants to know if you will honor your agreement. Do you have integrity?

In order to establish credit, be honorable. Do what you say you will do.

I know I’m making this out to be very elementary, but it really is.

A lender—no matter who the lender is, whether a mortgage lender, car dealer, credit card company, family member, or friend—is going to want to evaluate you. That evaluation starts by asking themselves, “Is this person trustworthy enough to pay me back what I’m lending?”

They will look at your recent financial history to find out, “Has this person ever not kept their word with someone else?” This is basically what a credit report is telling them.

What If You Don’t Have Any Credit?

And for the person who doesn’t have any established credit at all, they will have to begin by validating their word. A good (but not the only) place to start is with a credit card.

Those who have no credit will not receive very favorable terms or be able to borrow a lot. However, if you show the lender you will honor your agreement to pay on time, you will slowly build up your name as an honorable person. You will then be able to receive credit from others.

What If You Have Damaged Credit?

Maybe you’re in this camp where you’ve made some horrible mistakes or were uneducated about money matters and now have terrible credit. Don’t worry. You can get back on track.

This was me! In college (when I finally decided to go), my financial know-how was so terrible, I believed if I ran up a bill and didn’t pay, it didn’t matter. After all, I’d be moving after college anyway.

I had no idea about the importance of my social security number. Yes, I was that stupid.

If I was that stupid and able to change things around, I know that with a little education you can, too!

So, now we know what credit is and what to do if we’ve never had credit or if we have bad credit. Let’s get this credit thing established.

The following practical steps will help.

Sad businessman leaning on glass

Related: Young, No Money, No Credit? Work for Experience

How to Establish Good Credit

  1. Pull Your Credit Report

The first thing you need to do is pull your credit report in order to get a clear picture of where you’re at. You can access your credit report using free services like Credit Karma or Experian.

Many people think by not acknowledging their bad credit, it will somehow go away. No. You have to face those mountains in order to overcome them. Unless you face it, you will not know where to begin.

Next, determine if your situation is able to be overcome. You have to be honest with yourself.

If you have $200,000 in medical bills, can you honestly pay that? If not, then maybe bankruptcy is a viable alternative for you.

Remember, this is about integrity, so if you believe you can pay off a debt, then create a plan and have the discipline to execute it.

In doing so, you are not only showing your creditors you have a good name, you’re proving it to yourself, as well. The discipline in doing is creating your plan and sticking with it no matter what.

Even if you get side-tracked, be disciplined enough to acknowledge your mistake. Then, get right back on track.

  1. Evaluate Your Finances

Once you have looked over your credit report, then you need to evaluate your finances. Find out where you’re spending your money.

Think back about what I said earlier: it’s not how much money you make, it’s what you do with the money you make.

As Rabbi Daniel Lapin wrote in his book Thou Shall Prosper: Ten Commandments for Making Money, “Find the holes in your purse.”

What are you wasting money on? I was spending tons of money on fast food, gas, and overdraft fees (nothing to LOL about).

My fast food consumption was killing my money—and killing me. Once I slowed down considerably on the drive-thrus, I found that I didn’t incur the overdraft fees anymore.

The extra money I had at that point was used to attack my bills. This is an example of the discipline in doing.

Just like Dave Ramsey, I would suggest starting with little debts and paying those off first. Once the little debts are cleared, then take the money you were paying on the little debts and move onto the bigger ones.

Dave Ramsey calls this the “debt snowball.” I am proof that this works.

  1. Consider Why You’re Doing This

This could have been mentioned earlier, but you have to have a logical reason why you’re doing this. You can’t seriously get out of debt without a motivating reason why.

Clearly identify your why. Put it somewhere that is in front of you daily.

If you’re doing this because you want to buy a house, identify the type of house, the location, the price, the number of bedrooms, etc. The more clear your why is, the better it will serve as a driver of success.

  1. Reward Yourself

Now, don’t be foolish. You need to have some limitations, but you should also reward yourself.

This is psychological, as well. Every time you accomplish a goal, reward yourself a little!

Take pride in what you’re doing. It’s OK to buy yourself something—as long as it’s within reason.

  1. Go Get It

It’s as simple as that. GO GET IT!

You’ve done the evaluation, you’ve outlined your plan, you know why, and you know what. Now, just go get it.

Follow your plan, track your success, and watch yourself earn an amazing credit score. This does take daily work.

Try positive affirmations. One affirmation I have and continue to say daily, “I have a good name.”

  1. Go Give It

In addition, find an avenue to give. You might ask, “How can I give if I’m trying to pay off debt? Wouldn’t that be a waste?”

Absolutely not! You want to give because giving is an opportunity to sow seeds. The more seeds you sow, the greater harvest you will receive.

To grow almost anything, there is seed time and harvest time. We’re all looking for the harvest, but only those who sowed a seed will actually produce one.

And don’t be mistaken, you’re not only sowing to reap the benefits of a harvest. Your sowing is meant to serve as a harvest for someone else, as well.

It’s all reciprocal! If you look at some of the greatest earners, they are also the greatest givers. They understand the concept that life is built on an agricultural foundation of sowing and reaping.

This is one of the reasons I am enthusiastic about helping aspiring real estate investors. These are seeds I’m sowing for future harvest.


To wrap up my story, I went from a credit score in the low 400s (the lowest is 350) to 777 (the highest being 850). It took time, but I had to establish my name again.

And it feels great to have the confidence of knowing I will get the best interest rates—and I deserve them.

Take the steps outlined above, read the articles and books I referenced, have integrity, and give back. By doing so, you will accomplish all that you set out to do.

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How’s your credit? If you have no credit or bad credit, what steps are you taking to build good credit? What’s working? What’s not?

Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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