How to Build Your Credit Score

Building your credit score can be challenging, especially if have no credit history.

This situation can feel like a catch-22. You need credit to build credit, but it’s hard to get credit without credit.

Rest assured, there are ways to build your credit score from the ground up, and we’re here to walk you through them.

How your credit score works

Your FICO credit score is a three-digit number ranging from 300 to 850 used to indicate your ability to repay debt. The lower your credit score, the less financially responsible you seem.

Lenders use your credit score to determine whether to approve you for a loan and what interest rates to charge. Rental companies often check your credit score before accepting you as an apartment tenant. And while less common, potential employers may even check your credit before offering you a job.

Why does your credit score matter?

A bad credit score can prevent you from getting an auto loan, a mortgage, or even a job. It can also affect where you’re able to live by limiting your housing options.

If you’re dreaming of starting a small business, having bad credit can mean not qualifying for a business loan to cover your startup costs.

You also need credit for many utilities, including cable, water, electricity, and cell phone service. If you don’t have an established credit history, you’ll probably need to come up with a cash down payment to begin many utility services.

What factors make up your credit score?

There are several factors that go into calculating your credit score:

Payment history

The most significant factor in determining your FICO credit score is your payment history. In fact, payment history makes up 35% of your score.

Your payment history reflects whether you’ve paid your bills on time and how you’ve resolved any late payments. In addition, it details any accounts sent to collections, debt settlements, charge-offs, foreclosures, bankruptcies, wage garnishments, and public judgments.

Paying your bills builds this portion of your credit score over time. So, stay mindful of due dates and, if you must make a late payment, pay as early as possible (the later your payments, the greater the hit to your credit score).

Amounts you owe

Comprising 30% of your credit score, the second-largest factor is how much money you owe. This component is often referred to as your credit utilization ratio.

The best way to improve your credit score is to keep your credit utilization ratio below 30%. You can use a credit utilization ratio calculator to determine your current percentage.

Credit history length

The length of time you’ve been using credit contributes 15% to your credit score. That’s why financial experts recommend keeping older accounts open even if you no longer use them.

Closing an old account, such as a charge card for a store you no longer shop at, can bring down your credit score by more than you realize.

New credit

New credit comprises about 10% of your FICO credit score. This includes your latest accounts and any credit you’ve applied for recently.

When you apply for a new credit card or loan, lenders usually perform what’s referred to as a hard inquiry. Hard inquiries temporarily reduce your credit score and can stay on your credit report for up to two years. Therefore, you want to be mindful of how often you apply for credit when building your credit score.

Credit mix

The final 10% of your FICO credit score shows whether you have a healthy mix of different types of credit. For example, if you only have credit cards in your credit history, your score might get a small boost from adding an auto loan, store account, mortgage, or personal loan.

Ways to build your credit score

Understanding how to build your credit score is key when trying to establish a credit history. Here are a few ways to get started:

Get a secured credit card

One of the quickest ways to build credit is to use a secured credit card.

Unlike traditional credit cards, you’ll need a cash security deposit to get this type of card. The credit card company holds the deposit just in case you can’t make your payments. While deposit amounts vary, you’ll typically need $200 to $500 to get a secured credit card.

Make sure to choose a credit card company that reports to the three main credit bureaus. It may also be a good idea to choose one that offers an upgrade to a traditional credit card after proving your ability to make payments.

Get a credit-builder loan

Credit-builder loans are great for establishing or rebuilding credit. Like with a secured credit card, you’ll provide a certain amount of your own money, which the lender holds in a certificate of deposit (CD) or secured savings account. You’ll make payments until the loan is repaid and you receive the funds (minus any interest charges and fees).

While you want the lender to report your payment activity to the credit bureaus, keep in mind that they’ll also report if you miss a payment, so be sure to make your payments on time.

Become an authorized user

If you have a trusted friend or family member with good credit, see if you can add yourself as an authorized user on their account. As an authorized user, you’ll have your own card in your name, but the monthly statement will go to the primary account holder.

Lenders won’t run a credit check on authorized users. Still, they typically report the account’s payment history under each card user’s name. Any late payments will reflect negatively on your credit history. As such, it’s essential to keep open communication with the primary cardholder to ensure there are no missed payments.

Use a cosigner

If you don’t qualify for a loan or credit card on your own, set up a cosigning arrangement. A cosigner is typically a close relative, such as a parent or spouse, who has excellent credit and is willing to vouch for you by cosigning your loan.

Essentially, a cosigner lends you their credit score, trusting you’ll repay the debt. Then, you’ll start building your own credit history by making on-time monthly payments. Just be careful not to miss any payments, as doing so will negatively affect your cosigner’s credit and cause conflict.

Can I get a loan without an established credit score?

Yes, you can still take out a loan without having an established credit history. Lenders specializing in loans for bad credit look at your income and employment situation in addition to your FICO credit score.

Loans to consider if you have no credit

Here are a few loan options to consider if you need to borrow money now but don’t have good credit:

Payday loans

Also known as a cash advance, a payday loan is a short-term loan meant to be repaid on your next payday. You’ll need to provide the lender proof of your income, such as a paystub and bank statement, to determine how much you can borrow.

Installment loans

An installment loan gives you longer repayment terms than a payday loan, making it a great option when you need to borrow a larger amount of money. Depending on your loan terms, you’ll typically repay the borrowed amount within three to 24 months.

Title loans

If you own your vehicle and have a free-and-clear title, consider a title loan. A title loan is a type of secured loan that uses your car as collateral. Since the lender holds onto your title until you repay the loan, your credit history isn’t as much of a factor as your car’s value.

Lines of credit

A personal line of credit is kind of like a credit card in that there’s a maximum amount you’re approved for. Unlike a credit card, however, a line of credit lets you draw cash rather than make direct purchases. Better yet, you only pay interest on the amount you borrow.

Start building your credit score today

Knowing how to build your credit score is the first step. Once you’ve identified available credit-building options, you can work toward establishing a strong payment history.

If you still need to borrow money in the meantime, consider a personal loan from Advance America. We consider factors beyond your credit score in our approval process, so apply today!