Building a good credit score from nothing takes patience and discipline. It won’t happen overnight, but you can do things to speed up the process and make sure your score doesn’t slip in the process. To build a credit score from scratch, you first need to use credit such as by opening and using a credit card or paying back a loan. It will take about six months of credit activity to establish enough history for a FICO credit score, which is used in 90% of lending decisions. FICO credit scores range from 300-850, and a score of over 700 is considered a good credit score. Scores over 800 are considered excellent. Don’t expect a spectacular number right off the bat. While you can build up enough credit history in less than a year to generate a score, it takes years of smart credit use to get a good or excellent credit score. When you are just starting to build a credit score, time doesn’t work in your favor.
Lenders want to see good behavior over time, which is much of what FICO scores take into account:
• Payment history (35% of score): Have you made on-time payments consistently?
• Amounts owed (30% of score): How much debt do you have compared to how much available credit you have?
• Length of credit history (15% of score): On average, how long have your accounts been open?
• New credit (10% of score): Have you opened several new credit accounts in a short amount of time?
• Credit mix (10% of score): Do you have experience managing different types of credit and loans?
Proof that you make payments on time and don’t carry large balances on credit cards makes you a less risky, more trustworthy credit user in the eyes of lenders. Those responsible behaviors carry more weight when demonstrated over time, too, which is why building a good credit score from scratch doesn’t happen overnight. Unfortunately, the tricky part about building a credit score is getting the credit you need to create a credit history for a score. Fortunately, there are a few ways to start establishing a credit history and a good score.
Open a Secured Credit Card Account
Secured cards are designed for those with no credit history or those who are rebuilding credit. You can open a secured card when you aren’t eligible for other cards because this type of credit card requires a deposit. The deposit acts as collateral for the issuer if you stop making payments, so it’s less risky for them to approve you. Secured card deposits are refundable. Many issuers will upgrade you to an unsecured card upon request after you’ve demonstrated you can wisely manage the card. Credit card issuers report card balances and payment history to the credit bureaus typically every 30 days. So, it’s easy to build a credit history with a credit card since those factors have big impacts on FICO credit scores. Each month you make an on-time credit card payment and don’t carry a balance on your secured card, your credit score should rise. While you might not be approved for a regular credit card, you could become an authorized user on someone else’s account, like your parents or spouse’s account. Authorized users have a credit card and can use it just like the primary account holder, but have no legal responsibility for the account. The credit history of the account shows up on the authorized user’s credit report so long as the card issuer reports authorized user data to a credit bureau, which can give you a credit score boost. Becoming an authorized user is a way to jump start credit score growth and is not a long-term fix. Real credit score growth will come from building your credit history, not piggybacking on someone else’s. Think of this option as a stepping stone to get you to your next credit tool, whether that’s your credit card or a small personal loan.
Get a Credit Builder Loan
When you get a credit builder loan, the lender will deposit the amount you are approved for into a savings account. Then you repay that loan over time, plus interest. Unlike a traditional loan, you don’t walk away from the bank with money right away. Instead, once you’ve paid the credit builder loan in full, the lender will give you the money with any interest earned from the savings account. This process establishes payment history data for your report, as long as the lender reports those details to the credit bureaus. Before getting a credit builder loan, verify the lender will report your payments to a credit bureau.
How to Maintain a Good Credit Score
All it takes to raise your credit score are positive changes to your credit report information. It’s actually easier to damage your credit than it is to build it, so here’s what you should do to keep your credit on the up and up once you get started.
Only Charge What You Can Afford
Credit cards are a tool, not an excuse for a shopping spree. If you open a card to start building a credit score, use it for small purchases that fit your budget and pay the card off in full each month. Regular use and full payment are important as your credit utilization ratio the proportion of debt compared to available credit is the second biggest factor impacting your credit score. The goal is to keep your credit utilization ratio as low as possible, so the more you can pay each month, the better. You will chip away at your debt faster, helping to decrease your credit utilization rate and raise your score, and you will save money on interest.
Pay Your Bills on Time
Since payment history has the most impact on your credit score, don’t let late payments derail your progress. When you apply for a new credit card or loan, the issuing bank will check your credit, which is considered a hard inquiry. Hard inquiries will cause your credit score to dip temporarily. It’ll bounce back as time passes, and more positive behavior is reported. However, if you are already starting from scratch, even a slight dip of 5-10 points can be significant. Plus, credit bureaus keep tabs on how many times you apply for new lines of credit. Too many hard inquiries on your credit report can be a sign that you are desperately seeking credit and pose a risk to lenders. When you are new to credit and building a score from nothing, time is your friend. Even if a year from now, you have a card you no longer want or use, keep the account open unless it charges an annual fee. The length of your credit history directly impacts your FICO score, so the longer your accounts are open, the better your credit score.
A credit score is a three-digit number that aims to summarize your creditworthiness. Lenders can take a quick look at this number to determine what kind of risk you are. If you’re not great at repaying your debts, that would be reflected in a lower credit score. Generally, good credit scores range from 700 to 749. If you have a score between 750 and 850, then you fall in the ‘great’ range. With a credit score of 700, you’re likely to be approved with favorable loan terms. If you have a credit score of 700 or higher, you should feel confident applying for financing. A credit score in the 700s is a remarkable milestone. Although it will take time, it’s completely possible to achieve. Here’s how to get started:
• Pay all of your bills on time.
• Never max out your credit cards.
• Don’t apply for every credit card you see.
Benefits Of A High Credit Score
A high credit score can supercharge your path to several common goals. For most people, a high credit score is most important when they buy a home. A high credit score can equate to lower interest rates and more favorable terms. Over the life of your mortgage, you could save thousands with slightly lower interest. Credit scores are looked at by many entities including loan officers, insurance companies, future landlords and potential employers. A high credit score will help you in any of these situations.
Credit Score Factors
Before we cover how to improve your credit score, let’s take a look at what a credit score includes. Each of these factors helps to determine the three-digit number with so much power.
• Payment history: Lenders want to know whether or not you make on-time payments.
• Length of credit history: Longer credit histories allow lenders to better understand your creditworthiness.
• Recent credit inquiries: Multiple credit inquiries can often hurt your credit score.
• Types of credit: Different account types such as credit cards and installment loans can increase your credit score.
• Credit Utilization: If you max out your credit cards, your credit score will suffer from a high utilization rate.
Check Your Credit Report
The step you should take is to pull your credit report and check for errors. If you find errors, take the time to dispute them. You can do this through a simple digital process. Errors on your credit report could hurt your credit score.
Make On-Time Payments
Although it may seem obvious, on-time payments can significantly increase your credit score over time. Make it a habit to pay your bills on time. Try setting up auto pay if you’re prone to forgetting when bills are due!
Pay Off Your Debts
If you have any outstanding debt, work to pay that off as soon as possible. Although a creditor may one day give up on your outstanding balance, unpaid debt would greatly hurt your credit score.
Lower Your Credit Utilization Rate
A high ratio of debt to credit can negatively affect your credit score. You can either pay off this debt or apply for a credit increase to reduce your utilization rate. Another way to do this is by paying your credit cards off early each month so that your posted balance is lower than your spending for the month.
Consolidate Your Debt
If you have trouble keeping track of multiple accounts, consolidating could be a good option. You can consolidate multiple debts into a single installment payment. In this case, you’ll be free of multiple payments to keep track of. Plus, you’ll be working towards a higher credit score.
Become an Authorized User
If you have a trusted family member with a good credit score, you have an opportunity to dramatically increase your credit score. You can become an authorized user of their account in order to boost your score. However, this can be a taxing emotional burden. If you don’t repay your debts, then you could hurt their credit score. Talk through the pros and cons with your family member before trying this method.
Leave Old Accounts Open
Even if you rarely use your first credit card, leave it open. Credit scores factor in the length of your accounts and a relatively old account can help to pull up your average account length.
Open New Account Types
Credit scores factor in the types of accounts you have open. If you only have one type of account open, that is likely hurting your score. If you only have a mortgage, then consider opening up a credit card account for more account types.
Open a Line of Credit at Your Bank
If you’re a longtime customer at your bank, you may be able to open a line of credit without a high credit score. With this line of credit, you’ll boost your credit-to-debt ratio and positively impact your credit score.
Open a Secured Credit Card
If you don’t qualify for unsecured credit cards, then a secured card could be the way to go. Secured credit cards are backed by a cash deposit, so even borrowers with poor credit scores can get one. Through this card, you’ll be able to improve your credit score by proving your creditworthiness with on-time payments.
What Happens to Your Credit Score after Bankruptcy?
Filing for bankruptcy can give you a fresh start by clearing away most of your existing debt. However, the negative effects of bankruptcy on your credit can be significant. A lower credit rating makes it harder to qualify for things like a car loan at a good interest rate. It can also affect your credit limits on cards offered to you. But just how much does your credit rating drop and how long does it take to improve your score after final discharge? The two types of personal bankruptcy affect your credit differently. In both cases, bankruptcy creates a negative item on your credit report. However, the time this negative item remains differs between the two Chapters:
• Chapter 13 bankruptcy credit report penalty: Lasts seven years from the date of final discharge
• Chapter 7 bankruptcy credit report penalty: Lasts ten years from the date of final discharge
The effect of these penalties on your credit score can vary. If you have a high score, then bankruptcy tends to have a greater impact. The point-decrease is often less with a lower score because you have less room to fall.
Step-by-step instructions for raising credit score after bankruptcy
Once you receive final discharge, wait 30 days and then:
• 1Go to annualcreditreport.com to download three credit reports from each bureau.
• Make sure all accounts included in bankruptcy show a zero balance; the late payments made before you filed will still show up on your credit report after bankruptcy.
• If any accounts don’t appear as paid, go through credit repair to make disputes so you can have those items removed.
• If you have debts that were not discharged, like student loans, make all the payments on time to begin building positive payment history.
• Consider getting a secured credit card using a small cash deposit or a small personal loan.
• Make all the payments on time; if you opened a credit card, never carry a balance of more than 30% of your total available credit limit.
• Gradually take on new credit after you make sure you can afford the payments; don’t open more than one account at a time within a six-month period.
• Work your way up to bigger loans, like a car loan, so you hold a diverse mix of debts.
When you need bankruptcy or credit repair help, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506