How To Build A Good Credit Score From Nothing
Why should you build a good credit score? A good credit score means you're more likely to receive financial opportunities, higher credit limits, and lower interest rates.
Okay, what does all that mean? It means that when you're looking into buying big money items or need a loan, your credit score will determine how much will be available to you and the interest rate that goes along with that.
Lenders use your credit score to judge your potential credit risk and ability to repay loans. So a high credit score is good; it means you're a low risk to lenders - you've proven that you're trustworthy.
Take a look at these blog posts if you need help paying off your debt on a low income or want advice on the best ways to save money.
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Your credit score is a three-digit number between 300 to 850.
What is considered a good credit score range?
Poor: 300 to 579
Okay: 580 to 669
Good: 670 to 739
Very good: 740 to 799
Excellent: 800 to 850
To give you an idea of why you need to start building a credit score now, most big item purchases require a credit score of 600 and above.
For example, what's a good credit score to buy a car? 660 or higher. And a good credit score to buy a house? 620 or higher, the same score counts for renting an apartment.
Fear not! Building your credit score is very doable if you follow these steps.
4 Ways To Build A Good Credit Score
Disclaimer: I am not a financial advisor. All information, including any ideas, opinions, views, commentaries, or suggestions expressed or implied herein, are for informational or educational purposes only and should not be construed as personal financial advice.
1. Start now
A determining factor for your credit score is the length of your credit history. The earlier you start, the better. Sad that you didn't start five years ago? Then the next best time is NOW.
If this very minute isn't feasible, set yourself a reminder for tomorrow or within the week, and then take action.
Apply for a credit card with your current bank or wherever suits you.
Start using this card to make small purchases (buy groceries or fill your car).
Repay the money IN FULL every month.
This last step is super important for you to build good credit fast. If you're prone to forgetting payments, set reminders or automatic repayments to ensure you don't miss any payments.
What if I can't get a credit card?
If, for whatever reason, you can't get your own credit card, you can also ask to be an authorized user on another person's card. Doing so adds that card's payment history to your credit files.
You don't even have to use this person's credit card to benefit from being an authorized user. This is just a stepping stone to building some credit in order to apply for your credit card as soon as possible.
2. Don't use ALL the credit
Apply for and accept the highest possible credit amount available to you, BUT do not use more than 30% of the available limit.
This is called your credit utilization. The lower the amount you use out of your overall limit, the better your score.
Example:
If you have $10 000 at your disposal, do not use more than $3000.
Pay this back in full within the month.
If you can manage utilization of 10% or less, that's even better.
Think of it this way, whatever you spend must still fall within your budget. Having and building credit does not equal extra money you can spend. Your spending must not exceed your monthly income after tax, deductions, and what you budgeted for. If you've never had a budget in your life, now's a great time to learn how to budget.
If you keep your credit utilization ratio as low as possible for as long as possible, your credit will build fast. As long as you also pay it off in full every month, without fail.
3. Have more than one source of credit
Don't have too many credit applications in a short period of time but have more than one.
Apply for one and then wait six months before you apply for another.
Always research the best credit cards for your needs, don't just apply willy-nilly. Nerdwallet has great comparison articles and helpful information on choosing the best credit card.
Too many credit applications will seem desperate and might indicate to lenders that you're prone to overspending. On the other hand, having only one might not provide enough information to make lenders trust your ability to pay them back; I know, go figure.
4. Pay your bills on time
All unpaid bills (separate from your credit), including medical, cell phone, rent, water, lights, etc., will appear on your credit report and negatively impact your score.
Pay on time!
Some credit bureaus allow alternative data to be added to your credit report—alternative data, such as rent and cell phone payments, etc. I mean, if you've been paying your rent and utilities religiously every month, surely that must count towards good credit!
Missed or late credit card payments come with crazy fees. In addition, your account gets flagged every time you miss a payment, and in turn, it hurts your credit score.
Do not miss payments; it's like throwing money in the water. Set reminders for automatic payments to go off.
The Bottom Line
These are four actionable steps to building a good credit score from nothing. Your biggest challenge is to always pay on time, even if only the minimum repayment amount. If you're a forgetful person, set reminders and automatic repayments. Use as little as possible or your available limit; this is not the time to go on a spending spree because you have funds available. It takes at least six months to build a good credit score - start now!