Credit score plays a crucial role in financial decision-making. It affects everything from your ability to get approved for a loan to the interest rate you pay on credit cards. If you’re new to the credit game or just starting to build your credit score, it can be overwhelming. But don’t worry! In this blog post, we’ll go over the basics of how to build your credit score from scratch. By following these tips and strategies, you can start on the path to good credit and achieve your financial goals. Let’s get started!
Understanding Your Credit Score
Your credit score is a three-digit number that represents your creditworthiness. Lenders and financial institutions use your credit score to evaluate the likelihood of you repaying your debts. Your credit score can range from 300 to 850, with 850 being the highest score possible.
There are several factors that go into calculating your credit score, including your payment history, credit utilisation, length of credit history, new credit inquiries, and types of credit. Payment history and credit utilisation are the two most significant factors that determine your credit score. Payment history refers to your track record of making on-time payments. Any missed or late payments can negatively impact your credit score and stay on your credit report for up to seven years.
Credit utilisation refers to how much credit you are using compared to your credit limit. High credit utilisation can indicate that you are overextended financially and can negatively impact your credit score. It is essential to understand your credit score and the factors that affect it so that you can take steps to improve it. By doing so, you will have access to better interest rates and loan options in the future.
Steps to Build Your Credit Score from Scratch
If you’re starting from scratch with no credit history, building your credit score can feel like an overwhelming task. However, it’s important to start somewhere and take small steps to improve your creditworthiness. Here are some key steps to consider:
- Apply for a secured credit card – A secured credit card requires a security deposit as collateral. This can be a great option if you’re unable to get approved for a traditional credit card. By using a secured credit card and paying your bills on time, you can start building a positive credit history.
- Become an authorised user on someone else’s account – Another way to start building credit is by becoming an authorised user on someone else’s credit card account. This can be a family member or friend who has good credit. By being an authorised user, you can piggyback off of their good credit history and build your own credit score.
- Consider a credit builder loan – Credit builder loans are specifically designed to help people build their credit. With these loans, you’ll make monthly payments that are reported to credit bureaus. Over time, this can help build your credit history and improve your credit score.
- Pay your bills on time – One of the most important factors in your credit score is your payment history. Be sure to pay your bills on time, every time. This includes credit card bills, loans, and other bills like rent or utilities. Even one missed payment can have a negative impact on your credit score.
- Monitor your credit score regularly – As you build your credit, it’s important to keep an eye on your credit score. This will give you a sense of how you’re doing and alert you to any potential errors or issues. You can get a free credit report from each of the three major credit bureaus once per year. Some credit card companies and other financial institutions also offer free credit monitoring services.
Building your credit score from scratch may take some time and effort, but it’s worth it in the long run. By taking these steps and staying committed to good credit habits, you can establish a strong credit history and improve your creditworthiness.
Paying Your Bills on Time
One of the most important things you can do to build and maintain a good credit score is to pay your bills on time. This includes everything from credit card bills to rent or mortgage payments to utility bills. Late payments can have a major negative impact on your credit score, so it’s crucial to make sure you’re always paying your bills on or before the due date.
To help ensure you never miss a payment, consider setting up automatic payments or reminders through your bank or credit card issuer. This can be a great way to stay on top of your bills without having to remember to manually make payments every month.
If you do miss a payment, don’t panic – try to make the payment as soon as possible. Most credit card issuers and lenders won’t report a missed payment until it’s at least 30 days late, so there may still be time to avoid a negative impact on your credit score.
Finally, if you’re struggling to keep up with your bills, consider reaching out to your creditors or a credit counselling service for help. It’s much better to address the issue proactively rather than waiting until it’s too late. By staying on top of your bills and paying them on time, you’ll be well on your way to building a strong credit score.
Secured Credit Cards
Another great option for building your credit score is by using secured credit cards. A secured credit card requires a deposit upfront that serves as your credit limit. This deposit protects the issuer from the risk of lending to someone with no credit history.
Using a secured credit card responsibly can help establish a positive credit history and increase your credit score over time. Here are some tips for using a secured credit card to build your credit:
- Choose a reputable issuer: Look for a secured credit card from a reputable bank or credit union. Avoid high fees and interest rates.
- Use the card for small purchases: Use your secured credit card for small purchases, and make sure you can pay off the balance in full each month. This will show that you can manage credit responsibly.
- Make payments on time: Payment history is the most significant factor in your credit score, so make sure to make payments on time every month.
- Gradually increase your credit limit: As you make payments on time and demonstrate responsible credit use, some secured credit card issuers may increase your credit limit without requiring an additional deposit.
Remember that using a secured credit card is just one piece of the puzzle in building your credit score. Make sure to use all of the tools available to you, such as paying your bills on time and monitoring your credit score regularly.
Authorised User on Someone Else’s Account
If you’re struggling to build your credit score from scratch, becoming an authorised user on someone else’s account might be an option for you. Essentially, you are added to someone else’s credit account as a secondary cardholder, allowing you to benefit from their good credit habits.
When you become an authorised user, you’re not responsible for paying the bills. That responsibility falls on the primary account holder. However, any positive credit history they make will also be reflected on your credit report, potentially helping to boost your credit score.
But before you become an authorised user, there are a few things to keep in mind. First, you want to make sure that the primary account holder has a good credit history. If they have a history of late payments or high credit card balances, becoming an authorised user may actually harm your credit score.
Additionally, it’s important to set clear expectations with the primary account holder. Make sure they understand that you won’t be responsible for paying the bills and that you’ll only use the card responsibly. It’s also a good idea to set limits on how much you’ll use the card to avoid overspending.
Becoming an authorised user on someone else’s account can be a helpful way to start building your credit history, but it’s not a long-term solution. You’ll want to eventually apply for credit on your own and establish your own credit history. However, in the meantime, it can be a good way to get started and potentially improve your credit score.
Credit Builder Loans
If you’re looking to build your credit score but don’t have much of a credit history yet, a credit builder loan could be a great option for you. Credit builder loans are specifically designed for people with little to no credit history, so they’re a great way to start building credit from scratch.
With a credit builder loan, you borrow a small amount of money from a lender, but instead of receiving the money upfront, you make payments on the loan over time. The lender reports your payment history to the credit bureaus, so as long as you make your payments on time, your credit score will gradually improve.
Credit builder loans are typically offered by banks, credit unions, and online lenders. When you take out a credit builder loan, the lender will hold the funds in a savings account, CD, or other type of secure account. You then make regular payments on the loan, which are reported to the credit bureaus.
Once you’ve made all of your payments, the lender will release the funds to you. This means that you’ll end up with a small sum of money, but more importantly, you’ll have a solid payment history on your credit report. This can be particularly helpful if you’re looking to apply for other types of loans in the future, such as a car loan or a mortgage.
While they may not be the fastest way to build credit, they can be a helpful tool for building a solid credit history over time.
Avoiding Credit Mistakes and Pitfalls
As you work on building your credit score from scratch, it’s important to also be aware of some common credit mistakes and pitfalls that can negatively impact your score. Here are some things to avoid:
- Applying for too many credit cards or loans at once. This can make you look like a risky borrower to lenders and can result in multiple hard inquiries on your credit report, which can lower your score.
- Maxing out your credit cards. Keeping your credit utilisation (the amount of credit you’re using compared to your credit limit) below 30% is important for a healthy credit score. Maxing out your cards can make it look like you’re relying too heavily on credit.
- Ignoring bills or making late payments. Payment history is the most important factor in your credit score. Even one missed or late payment can have a negative impact on your score.
- Closing credit card accounts. If you close a credit card account, you lose that credit limit and can increase your credit utilisation ratio. Additionally, closing your oldest credit card account can shorten your credit history and lower your score.
- Co-signing for someone else. Co-signing for a loan or credit card can make you equally responsible for the debt. If the borrower doesn’t make payments, it can hurt both of your credit scores.
By avoiding these common mistakes and pitfalls, you can continue to build and maintain a healthy credit score. Remember, it takes time and consistent effort, but the rewards are worth it.
This is not intended to be financial advice, but personal opinion only. Please see financial advice from a financial advisor and do your own research before making any financial decisions.