Most financial institutions rely on your credit score to determine the amount of credit or loan to give you. You can now see the importance of learning how to build credit when you have none to stand a better chance of getting loans and credits from banks. Everybody has to start from scratch in every event of life. It explains why people who have no financial records need to start building their credit score from scratch. Most times, these are the young lot starting life.
Have you asked yourself why some people find it easy to get loans from their financial institutions? It is because they have good credit records as well as excellent credit scores. That way, their banks or any other financial institutions can trust them with their money. Such people have outstanding records of previous payments of loans and line of credits. It is also important to note that such people started building their credit score from scratch and maintained financial discipline and reached where they are.
Another thing to note is that you can rebuild your credit score if you have dropped from a high FICO score to a low one. You may take a loan or a line of credit and fail to pay on time due to financial constraints which are generally unavoidable. Such inconveniences lower your scores. However, there is still hope of regaining your high credit score. Obtaining a credit card with a 5000 limit with bad credit is one way of rebuilding your credit score.
What is a Credit Score?
In a simple language, a credit score refers to the numerical expression of your creditworthiness. Mostly, the concerned agencies calculate people’s credit scores using the FICO guideline. Credit scores range from 300- 850. A score of 300 is poor, while a score of 850 is excellent. The higher the number, the better your score.
There are many factors that credit score calculators consider. Each element contributes to a certain percentage of the overall score. You will learn more about these factors and their contributions to your entire credit score shortly.
How is a Credit Score Calculated?
Calculations for a credit score consider various factors. To come up with a final score, credit companies follow the FICO score, which breaks down the process as follows.
- Payment history- 35%
- Debts- 30%
- Length of credit history-15 %
- New credit – 10%
- credit mix- 10%
If you look closely, all the categories add up to 100%. You can see where you should put a lot of emphasis to score well. Having a good payment history and fewer or no debts can help you very much to have a good credit score.
Which Companies Are Responsible For Calculating Credit Scores?
In the United States of America, three main companies help to calculate credit scores of individuals. These include Equifax, TransUnion, and Experian. All three companies use the FICO score guidelines to determine people’s credit worthiness. Banks and other institutions are required by law to report all their customers’ financial records to the bureaus.
Each of the three companies comes up with a credit report as well as a credit report of all the people whom they receive their credit information. Any financial institution willing to inquire about your ability to pay a loan or credit can buy the information about your credit score from these companies. You are entitled to a credit report every year from these companies.
If you want to reach the companies, then their details are as follows.
Website address: www.experian.com
Website address: www.equifax.com
Website address: www.transunion.com
How do You Get Your Credit Report?
As I had mentioned earlier, you have a right to get your reports once from each company every year. The reports are usually for free. You can order online from annualcreditreport.com. The company is authorized by the federal government to collect credit details from the main companies and make them available to the owners. You can also call 1-877-322-8228 to get help.
When inquiring about your credit report from the annualcreditreport.com, there are various details you should provide. They include name, address, social security number, and date of birth to confirm your identity. Alternatively, you can get your credit report directly from the credit bureaus. However, you have to buy the report.
If you want to get your credit report several times a year, you can distribute the credit inquiries three times a year by getting a report from a single agency at a time. You can decide to get a report from Experian in March, get another one from TransUnion in August, and the last one from Equifax in December.
How do You Build Credit When You Have None?
If you have a bad credit score, you should not worry as that is not the end of things. You can raise your credit score within a short time if you check on various vital issues. There are ways on how to improve your credit score in 30 days and regain your original records. Ways on how to build your credit score include the following.
1) Get a secured credit card
The first thing you should do is to look for a secured credit card that builds your credit score. There are many institutions out there that give either secured or unsecured credit cards to help you improve your FICO score. If you utilize a credit card well, then you can increase your scores very fast.
A secured credit card allows you to deposit a certain amount of money to act as your credit limit. If you deposit $500, then you can only take a credit line not exceeding the $500 deposit. If you use your card well by spending below the credit line and ensuring that you do not touch the deposit, your credit score improves tremendously.
With time, you can now apply for an unsecured credit card since you will have excellent credit. Unsecured credit cards can also help you to realise a good credit score. If you happen to come across one, you can make an effort to apply for it. However, very few will give you a credit card without a credit.
2) Mix credits
Another thing you can do is to mix credits. Having a combination of credit cards, mortgage loans, personal loans, and car loans, among others, can contribute significantly to your credit score. It shows that you can handle diverse financial issues properly. However, you can only benefit from a credit mix trick if you pay the debts on time.
3) Pay all debts
In addition to the above, you can decide to raise your credit score 100 points overnight by paying all the debts you owe your bank or any other financial institution. Debt payments account for 35% of the total FICO score, and that explains why it is possible to improve your scores tremendously by clearing debts.
4) Check on identity theft
You should always be on the lookout to see if someone has used your identification documents to open a bank account. Some people have criminal behavior whereby one can get your identification number and opens a bank account or gets a line of credit.
When such people take loans and credit cards, they may disappear without paying thus making you lose credits. If you want to avoid identity theft, you can freeze your credit so that fraudsters cannot access it.
5) Apply for a Store Card
There are various shops and hyper stores that give out shopping cards so that you can shop from their holdings in credit and pay later. You can get a card from them and make sure that they report your payment details to the credit bureaus. With time, you will find yourself having a high credit score.
Amazon and Firestone have store cards that you can use to buy products from their stores. Amazon allows you to shop online using the card, which makes the card convenient to use.
6) Apply for a credit-builder loan
A credit builder loan works very well since it helps you to record a good payment history. Remember that I previously indicated that payment history occupies a big percentage in your credit score. Timely payments and of the agreed amount of money is a good booster to your score.
You might be wondering what a credit builder loan is. Well, a credit builder loan is very different from other ordinary loans in that, when you apply for the loan, the bank keeps the loan in an account, then you repay the loan as agreed.
After you finish repayment, the bank releases the money for you. Remember that when making payments, the bank reports your payment details to the credit bureaus. So in a real sense, a credit builder loan is only meant to increase your credit score to open doors for future opportunities to get loans and line of credits.
7) Find a Cosigner
If you decide on finding someone with a good credit score to act as your cosigner, then that is a good idea. The person agrees to pay the debt if, by any chance, you are unable to pay as agreed. Finding a cosigner is very difficult, and you should be grateful if you find one.
If you show good repayment behavior, your credit scores increases. In the future, you can then get a loan or credit on your own since you will have built trust with your bank. If you fail to pay on time or fail to settle your debt completely, you damage your score, as well as your cosigner’s score.
8) Have your bill payments reported to credit bureaus
If you pay bills such as water, electricity, and rent, among others, you can have those responsible to report your payment history to the credit bureaus. This way, you build your scores with time. Make sure that you pay on time to benefit from the program.
9) Become an authorized user to someone else’s credit card
If you have a relative who has more than one credit card, you can request him or her to allow you to use one of the cards and pay the debts yourself. Make sure that the card issuer reports your repayment details to the credit bureaus. With time, you will be able to increase your credit scores.
10) Avoid using too much credit
Overspending shows that you are incapable of managing money. If you have a credit card, spend below the credit line. Never exhaust your credit limit as this will affect your credit score very much. You should always strive to spend 30% or below. For example, if you have a credit limit of $600, you should make sure you spent $180 or less.
11) Maintain your accounts active
How long you have been operating, an account matters a lot. If you have a credit account, ensure that it remains active even when you do not need it. You can always spend very little to keep the credit card active. Old accounts attract scores to your overall credit score.
12) Do not take many cards at once
As long as you would like to increase your scores do not take many cards at once. It may send a signal of desperation to banks and affects your score negatively. You should start with a single card, and then proceed to apply for another card after around six months.
13) Get a student card
If you are schooling, you might consider starting to build your credit score slowly while in college by applying for a student card. You need to ensure that you will be able to pay debts on time. However, the cards have high-interest rates and low borrowing limits. Despite that, you can raise your credit score significantly.
A good credit score helps you to secure loans and lines of credit quickly. It is possible to raise your score within a short time to higher levels. If you want to succeed in your financial life, you should make sure that you make timely debt payments as well as minimizing the number of credits as much as possible. You should not take too many credit cards while you know that you cannot manage them properly.