Credit-Building
A credit score is a three-digit number that can greatly impact your life.
The seemingly small number reflects a measure of your creditworthiness, which can have an outsized effect on your finances. A good credit score can unlock a lower interest rate on long-term loans, which could save you thousands. But a bad credit score could bar you from accessing affordable loans for major purchases such as a home or car.
Clearly, your credit score is important. We’ll talk about just how essential below. But how can you build credit? We’ll also cover the best strategies to give your credit score the boost it needs.
What Is Credit-Building?
Credit-building employs strategies to improve your credit score. Wherever your credit score currently stands, credit-building can help you take it to the next level.
The goal of credit-building is to create a history of responsible credit usage. That means opening credit accounts and making on-time payments to keep these accounts in good standing.
To start, building credit can be as simple as that—making on-time payments to your accounts. The only downside is that it can take time to create a solid payment history for your credit report. In fact, it takes around two years for a credit account to be ‘seasoned.’ Seasoned accounts have enough age to show potential lenders that you can responsibly manage your credit. With multiple seasoned accounts on your report, your credit score should increase.
Although it takes time to build good credit, the steady approach of making on-time payments to your accounts will pay off.
No Credit vs. Bad Credit: Which is Worse?
When it comes to credit scores, there are good scores and bad scores. Here’s the breakdown of credit scores on a scale of poor to excellent:
Poor: 300 to 579.
Fair: 580 to 669.
Good: 670 to 739.
Very good: 740 to 799.
Excellent: 800 to 850.
If you have a credit score, you’ll be able to find out where you fall on the scale. But what if you don’t have any credit at all? Is it better to have a bad credit score? Or are you better off with no credit score at all?
In general, it is easier to achieve a good credit score if you are starting from scratch. That’s because you will not have negative marks on your nonexistent credit report to address. With that, you can jump straight into building credit.
If you have a bad credit score, though, you’ll need to start credit repair before credit-building. If you have a bad credit score due to multiple errors on your report, then working on credit repair should give your credit score a big boost. In that case, the process of credit repair might be faster than credit-building. But if you have legitimate financial mistakes on your credit report that have led to a poor credit score, then it will likely take more time to improve your credit score.
It will take some work to improve your bad or nonexistent credit score in either situation. The details of your credit report will determine whether it is preferable to have a bad credit score or no credit at all.
A Fast Tour Through the Stages of Building Credit
The good news is that you can build credit from wherever you are starting. Here’s a fast tour of the stages of credit-building.
Check Your Credit Report
If you have a credit history of any kind, the first step should be to check your credit report.
When you have your free copy, check it over for errors and mistakes. A few things to watch for include incorrect balances and incorrect payment dates. You may or may not find any mistakes. But if you do, dispute the error with the credit bureaus or the company sending the information to the credit bureaus.
If the error is removed, your credit score could see a boost. If you don’t find any errors, this step will still help you understand where you are starting from in terms of your credit history. If you don’t have a credit history yet, you should not have a credit report, but it’s a good idea to check anyway. If you discover that you do have a credit report despite never having credit, this is an indication that someone has fraudulently opened credit accounts in your name, and you will need to address the theft of your identity and the fraudulent accounts.
Maintain a Steady Income
An income is not a part of your credit score. But your income will play a big role in your ability to borrow money and repay your debts in full and on time. Without the option to borrow money, it can be almost impossible to build credit.
Borrow Funds
With a steady income, you may be able to take out a line of credit of some kind. Taking out a loan, line of credit, or credit card is a critical part of building credit. Otherwise, lenders won’t be able to discern how you manage your payments.
Two popular credit-building choices for those with no prior credit history include a secured credit card or a credit-builder loan.
Use Credit Responsibly
No matter how you choose to borrow the funds, the most important thing is to manage your credit obligations responsibly. In order to build your credit, you need to be able to demonstrate to lenders that you have a consistent pattern of responsibly using credit.
As you build a history of responsible credit usage, you will inch closer to your goal of having a good credit score.
