Building your Credit Score from Scratch

Everyone needs a credit score to get new credit cards, loans, and other financial products. Your credit score follows you from the minute you open your first credit line and is updated monthly.

Understanding how to properly build a credit score from scratch is the key to starting your financial life off on the right foot.

What is a Credit Score?

A credit score is a number calculated based on your credit history, aka how well you pay your bills and use your available credit. Your credit score is one of the most critical pieces of your financial puzzle and is the key to securing new loans, the best insurance terms, and sometimes even a new job.

How Does a Credit Score Work?

Your credit score is based on an algorithm used by the three credit bureaus – TransUnion, Experian, and Equifax. It rates your credit usage, payment history, credit age, types of credit held, and amount of total credit held and comes up with a number between 300 – 850.

These numbers are significant because they tell future lenders and creditors your level of credit responsibility. The higher the numbers, the better risk you represent, and vice versa. Most people don’t have a perfect 850 score, but any score over 700 is in the good to excellent range and should get you the loans and credit you need.

However, if you have bad credit because you pay bills late, overextend your credit, or don’t handle your credit responsibly, it could hurt your chances of getting future credit. Typically, any score lower than 650 can make it difficult.

What Makes up a Credit Score?

Credit scores have five major factors that influence them, including:

• Payment history – On-time payments are critical for a good credit score. They make up 35% of your credit score, so one late payment can hurt your score considerably.
• Utilization rate – How much credit you have outstanding compared to your credit line is 30% of your credit score. So it’s best to have no more than 30% of your credit line outstanding at one time.
• Credit history length – Your credit’s average age based on the age of all accounts is 15% of your credit score. The longer you have the same credit, the better it is for your score.
• New credit – Anytime you apply for new credit, it affects your credit score. This makes up 10% of your credit score, so don’t apply for new credit too often.
• Credit mix – If you show a good credit mix, such as installment, revolving, and mortgage loans, you can help increase your credit score. Credit mix is also 10% of your credit score.

4 Steps to Build a Good Credit Score

So how do you build a great credit score? Here are 4 simple ways.

• Get a secured credit card

A secured credit card has a credit limit equal to the deposit you make on it. If you miss your payments, the credit card company keeps your deposit. However, if you make them on time, you’ll increase your credit score and might be eligible for an unsecured credit card with no deposit required within as little as six months.

• Use a co-signer

If you have friends or family with great credit, consider asking them to co-sign your first loan or credit card. This will help you get better terms on your loan or credit card and allow you to build credit with timely payments.

• Pay your bills on time

Any credit you do have, make sure you pay the bills on time. Any payments made more than 30 days late can severely hurt your credit score. So it’s best to pay the bills as soon as they come, but no later than your due date.

• Become an authorized user

If you don’t qualify for enough credit, consider asking a family member to make you an authorized user on their credit card. Make sure it’s a card that reports to all three credit bureaus so you get good credit for your family member’s good credit habits.

Tricks to Build a Good Credit Score Faster

What if you need to build a credit score faster? Here are some simple tips and tricks.

• Pay your bills early – Pay your credit cards before their billing cycle. This ensures that the credit card company will report a lower balance to the credit bureaus, keeping your credit utilization low. In addition, this may help increase your credit score faster.
• Ask for higher credit limits – If you make on-time payments and don’t overextend your credit, consider asking for a higher credit limit. If a creditor increases your credit limit, it automatically decreases your credit utilization rate and increases your credit score.
• Use credit reporting services – If you don’t have enough credit cards or loans, consider using services like Experian Boost or a rent reporting tool to report payments like utilities and rent. Experian Boost is a free program that reports your on-time payments for cable, streaming services, utilities, and sometimes rent. If you make your payments on time, it will increase your score fast.

Credit Score Requirements by Loan Type

How can I Check my Credit Score?

It’s important to check your credit history and score often. All consumers get free access to their credit reports weekly, but this doesn’t include a credit score.

To know your score, you must sign up for a service like Credit Karma or Experian. You can also ask your bank or credit card companies if they offer free FICO access, as many companies offer this service to clients. 

Final Thoughts

Your credit score should be taken seriously. Building good credit and maintaining it is the key to solid financial decisions in the future. Start with a secured credit card or as an authorized user on someone’s credit card and work your way up to unsecured debt with on-time payments and good use of your credit lines to ensure your credit score remains high.