The Credit Building Paradox

Author: Noah Gomez

Published: 14 August 2023

The Credit Building Paradox (CBPdX) is a consumer credit catch-22 in which borrowers need debt to build credit, but need credit to get debt. It is inherent to modern debt-based economies with consumer reporting agencies such as the United States.

the credit building paradox

The credit building paradox is not the same as damaged credit. They both limit credit opportunities and can both be treated with the same approach, but they have different causes. Damaged credit is a result of missed payments on accounts, whereas the credit building paradox is a result of no accounts.

The credit "building" paradox is not to be confused with the credit paradox, which is a macroeconomic theory stating that "although a society perhaps could have debt without a bankruptcy system, it cannot have a bankruptcy system without debt." This theory is irrelevant to this article.

Consumers usually encounter the credit building paradox when they rely on cash (often through debit cards) for daily expenses and attempt to finance a first major purchase, at which point the lender responds negatively that they have no credit.

For example, borrowers who apply for home loans are told to first prove their creditworthiness with small debt like credit cards, but the same lender refuses to provide a credit card. Other instances include lenders who deny students for educational loans and instruct them to first build their credit with a personal loan, then refuse to provide the personal loan.

The credit building paradox has indirectly produced a body of loans and revolving credit lines with flexible eligibility criteria and collateral structures that provide a means to bridge the gap between zero (or bad) and good credit.


  • The credit building paradox is a catch-22 in which consumers need debt to build credit, but need credit to acquire debt.
  • It is the unintentional result of lenders protecting themselves against untrustworthy borrowers.
  • Lenders' risk-assessment says no credit history = unknown risk and prefer to let others assume it first.
  • The paradox affects all Americans with a social security number, except those who expect to never rent or borrow.
  • Authorized usership and loan guarantors can kick start a solution, but borrowers must ultimately develop a credit building plan.
  • Borrowers have nothing to lose and everything to gain by working on an immediate solution, unless they have large existing payday/title loans or consider themselves unreliable.
  • Build thick credit saves $1,000+ over a lifetime.


The credit building paradox is a self-imposed contradiction in consumer credit rating systems in which borrowers need debt to build credit profile but cannot access debt because they lack the credit profile.


Imagine two friends ask to borrow $100. The first has a history of needing money but always pays her debts, and the second has never needed to borrow money before. It's easy to lend to the first because she has a track record. It's hard to lend to the second because he is acting uncharacteristically, which raises questions about his ability to repay.

Banks think the same way. They shy away from those with limited or zero credit history because these people are quite simply higher risk.

Why It Exists

The Credit Builder Paradox exists because lenders need to protect themselves against dishonest and irresponsible borrowers. Lenders and credit agencies do not intentionally create it. Through actions of self-preservation they create the conditions for it to exist.

Specifically, the paradox arises from lenders' use of risk-assessment frameworks. A person with zero credit history poses an unknown risk that any one lender prefers to hand off to another. The fact that building good credit requires financial products whose eligibility criteria include having good credit is a chicken-and-egg issue lenders have little incentive to treat.

The reality is that the paradox has not actually hurt lenders because there is a way to get started. Consumers who dedicate effort to learning how to build their credit earn the trust of institutions through consistent action. A common way to circumvent the paradox is to leverage loan and card products with flexible eligibility criteria.

Who It Affects

The Credit Builder Paradox affects every American citizen with a social security number who wants to rent in a new area, get a job, purchase a home or car affordably, obtain low-rate and high-reward credit cards, or obtain business loans. Consumers who rely entirely on cash for daily expenses and don't plan to use credit are not impacted.

Americans who don't handle the paradox can find themselves pinched in a never-ending cycle, resorting to high-interest loans that don't require credit such as payday and title loans, and falling into a nasty debt trap.

The paradox has a disproportionate effect on Americans without friends and family to vouch for them because parents with strong credit scores can act as guarantors for loans and provide authorized usership on credit cards for their children.

Having and guarantor and becoming an authorized user limits risk to lenders because the signatory (parent) becomes responsible if the borrower (child) does not pay.

It does not, however, pass down credit profile. This is a common misunderstanding and source of frustration for young consumers. Many authorized users obtain FICO 8 scores in the 700 range and assume the score gives them a competitive advantage on new credit, but they are nevertheless denied on applications.

The reason is score ≠ credit. Lenders can see authorized usership and guarantors on credit reports, and they know that the borrower is distinct from the signatory. Borrowers can use the score to access low-value products, but they must still use those products responsibly and strategically and engage the credit building process.

Some borrowers overcome the dilemma unknowingly, though it is rare to do so without family and generational best practices passed down. The process of building credit can also be done strategically according to a curve that minimizes cost and time, and maximizes card rewards.

When to Tackle It

The best time to tackle the credit building paradox is immediately. There is no benefit to inaction and few downsides to starting today (see below). Earlier action saves more money and opens more opportunity over a lifetime. It's not rocket science, and numerous credit building plans outline what products to get, when, and how to use them.

For example, BMO Bank offers a credit builder loan for $1,000 over 42 months on average. This means consumers pay $34 per month for a grand total of $436 in interest. They receive the $1,000 back at the end of the loan as a lump sum of savings.

There are, however, two justifications for waiting. Consumers who consider themselves unreliable are not strong candidates because credit building requires a degree of planning. Additionally, consumers with payday loans or title loans (which usually don't affect credit) should pay those off entirely before moving forward, as well as any unpaid bad debts such as charge-offs or collections.

Some consumers avoid acting because the process feels overwhelming. Add the cost of credit building products, and it's easy to set aside the idea. The trouble with this thought process is that waiting increases cost. For example, improving rate by 1% on a 30-year $500k mortgage saves over $100,000. The return on investment for credit building is high.

Beating the credit building paradox is not difficult, but it requires knowledge of trustworthy products and step-by-step techniques to leverage them. It also requires the use of products over at the right moments over time.

Consumers often lean on secured credit cards because they provide a low-cost way to get started. The issue with secured cards is that they act like a painkiller to cover the problem but do not address the core issue: thin credit profiles can have high FICO scores and still be denied. A proper credit building plan is the best way to build thick credit that lenders can't ignore.

Nice to Know, Thanks

Credit is boring.
It only matters when we want

  • cars
  • homes
  • biz loans
  • credit cards
  • etc.

If you want this stuff, why wait?
It's not rocket science, you just need a guide.

About the Author

Noah Gomez (founder of Thick Credit) is a transatlantic professional and entrepreneur with 3+ years experience in consumer finance education. He also has 5+ years of experience in corporate finance, including debt financing, M&A, listing preparation, US GAAP and IFRS.

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