Your credit score can be baffling at first glance. It is simpler to ruin your score than raise it, and it is not always evident what financial aspects contribute to it. Achieving a higher credit score is an insurmountable challenge. However, you can do a few things to boost your ratings and make yourself a more desirable borrower.
Methods used to determine one’s creditworthiness
The data in your credit report is used to determine your credit score. Credit scores may vary slightly among a person’s three reports, one each from Experian, TransUnion, and Equifax. FICO, however, employs the same algorithm to produce a credit score regardless of whatever credit report it is utilizing, making it the most popular credit scoring system.
Your credit score is determined by the following five factors:
- The credit mix (10%) comprises both revolving credit (credit cards) and installment credit (mortgages, auto loans, student loans). Combining the two types is ideal for you.
- New credit (10%) accounts for all new credit cards, loans, mortgages, and other credit line openings.
- How regularly you have paid your bills on time to assess your payment history (15%).
- The longer you have had a credit card or loan, the better. So, your length of credit history (15%) also accounts for determining your score.
- The extent to which you use the credit you have obtained, or your credit utilization (30%). To get your credit utilization ratio, divide your overall credit use (debt) by your total credit limit. For example, with a credit limit of $10,000 and a balance of $3,000, your usage rate is 30%.
How to start building credit if you don’t have any accounts yet
When you first start to build your credit, it may take a lot of work to get things going. The fastest way to build credit is with a credit card, but you need credit to get one. There are a few things you can do, though.
1. Apply for a credit card with a deposit
If you have no credit, getting a secured credit card is usually easier because you have to put money down to get it. Most secured credit cards use your security deposit as your credit limit. For example, if you put down $500 as a security deposit, your credit limit would be $500. However, there are a few cards that will give you a credit limit that is higher than your deposit. Companies have different minimum deposit amounts.
Your secured credit card works just like a regular credit card. You can use it to shop online, buy food, or pay for gas. You will make a payment each month based on what you do. The three main credit bureaus are told about both on-time and late payments (TransUnion, Equifax, and Experian). Your credit score will go up if you make payments on time, and go down if you do not. Secured credit cards are the same as unsecured credit cards because you will be charged interest if you do not pay off the balance each month.
2. Use a store or unsecured credit card to build your credit
Even if you have no credit history, getting a store or traditional credit card that does not need a deposit is possible. Store cards are usually easier to get approved for, and they can help you start building credit until your score is high enough to get a regular credit card. On the other hand, the APR on store credit cards is usually higher than on other credit cards.
If you want a traditional credit card, it is best to look at cards for students and people who do not have credit. If you are not approved the first time, it can help to wait until the creditor tells you why. You will get a letter in the mail that tells you why your application wasn’t accepted. From there, you can figure out what you need to work on or look for a card that is easier to get if you have a credit score like yours.
3. Join the list of authorized users
If a close friend or a family member has good credit, ask them if you can join their list of authorized credit card users. You won’t need to charge anything to the account to get the benefits, and if the cardholder wants to, they can order a card for you. As an authorized user, your credit score will go up every time the cardholder uses their card or makes a payment on time.
Just make sure that the person you choose is responsible for their credit. If they are always late with their payments or use up all of their credit, this will also show up on your credit report.
4. Get a co-signer
If you need help getting approved for a credit card or loan, you could ask a friend or family member with good credit to co-sign your application. With a good credit score, a co-signer can help you get a loan. Just make sure to use your new credit wisely. If you do not pay on time, it will hurt both your credit score and the credit score of the person who co-signed for you.
5. Apply for a loan to build up your credit
Anyone with low or no credit can use a credit builder loan to raise their credit score. But it is not a loan in the usual way. The money you ask to borrow is kept in a separate account instead of being given to you right away. You will pay on this loan monthly, and your lender will report your payment history to the credit bureaus. You will be able to use the money once the loan is paid back.
A steady income is the only thing you need to get a credit builder loan. There is no minimum credit score or co-signer requirement.
You will have to pay interest on the loan, and you will have to pay it back by a certain date, usually 24 months or less. In certain cases, credit builder loans may earn you interest, but the amount is never more than what you will pay in interest.
6. Choose to list your bills on your credit report
You can also add rent and utility bills to your credit report for a monthly fee via third parties. There are some companies like LevelCredit, Rental Kharma, RentTrack, and PayYourRent that do this. Each company has a different price and a slightly different service, so you should do some research before you choose one. Just make sure you pay your bills on time. If you do not, you could hurt your credit.
Experian also has a free service called Experian Boost that lets you report bills, but the downside is that it will only affect your Experian credit score. It won’t change your scores at TransUnion or Equifax. But your Experian credit score change might happen on the same day.
Once you have a credit history, here’s how to build it up
Follow these tips to improve your credit score even more once you have access to credit accounts.
1. Request a new credit card
If you already have a credit card and use it wisely, getting another one could help your credit score even more.
When you apply for a new card, the hard credit check will cause your score to drop by about five points. But if you are approved, your new credit line should raise your utilization rate, which is one of the things that affect your credit score, and help your credit score.
It is not a good idea to open too many accounts in a short time. Hard inquiries can lower your credit score and show lenders that you may not be able to pay off your debts soon.
2. Request a credit limit increase
Like getting a new credit card, asking for an increase in the credit limit on the one you already have will lower your utilization rate, which usually raises your score. You can call your credit card company or ask for an increase online. To improve your chances of getting a higher line of credit, it’s best to do this after you have shown a pattern of good credit use, like making payments on time for at least six months.
3. Pay your bills in full every month
To raise your score, keep your debt low and the amount of credit you can use high. Paying off your card in full each month is the best way to do this. To make sure this happens, you should only charge what you can pay off by the due date.
Also, make sure you pay on time, so you do not get dinged for late payments and have to pay late fees. By signing up for AutoPay, you can make sure you never miss a payment.
Build or fix your credit score quickly
Paying down debt, making payments on schedule, and requesting an increase in your credit limit are the three most important factors in establishing credit quickly. By consistently applying these three strategies, you can eventually reach a point where your score is maintained healthy, completely automatically.
