Build Your Credit From Scratch

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Credit. You constantly hear about how important it is. It's a number, no one really knows what it means, but it matters when trying to obtain a line of credit. Your credit history is essentially a record of your ability to repay money you've borrowed. Therefore, payments made on time help boost your score and delinquent payments will decrease it.

If you've never had a credit card or loan, your credit is currently a blank slate. This means you get the opportunity to build your credit from the bottom up. Follow these steps below to ensure that you are on the right track to a credit worthy score:

Get a Secured Credit Card

It's just like a regular credit card, however, it is held by a security deposit that you put down anywhere usually between $300 and $500. Your credit limit is often this amount or a percentage of the amount.

It's common for people to confuse a debit card and a credit card. A debit card is provided by banks and does not report to the credit bureaus. A debit card is merely a simple way to access funds in your bank account. There are three major credit bureaus that track credit history: Experian, Transunion, and Equifax. If information is not being submitted to at least one of these three bureaus, it is not taking any effect on your credit score.


Only Charge What You Can Afford

Start small. The point of having credit is to prove your ability to pay back debt. Your goal is to prove to creditors and lenders that you can responsibly handle your finances and money borrowed. Even if you can only afford to charge $15 and then pay it off, it will still make a difference on your credit worthiness.

Although, it's not enough to just open up a credit card to keep on hand. You need to be using it, charging small balances, and paying them off in order for it to report to the bureaus. The golden rule is to never charge more than 50% of your cards limit and keep your balance somewhere between 10% and 30%.


Always, Always, Always Pay on Time

Credit bureaus report on delinquent accounts and late payments. Be sure to pay your bill on time to ensure you are on the right track to building positive credit.

Don't Apply for Multiple Credit Accounts Right Away

You want to build your credit score and you may be getting excited, but don't go applying just anywhere for a line of credit. Each time you inquire about a new line of credit that creditor reports it to the bureaus and you take a small hit from it on your credit score. Whether you are granted the line of credit or not, it will show up on your report and multiple inquiries will bring down your score vastly over time.

You have to first prove that you can handle one line of credit before anybody is willing to give you five lines. Use the secure credit card for at least six months before you apply for anything else.


After Enough Building Time, Check Your Credit Score

After six months of on-time credit card payments, check your credit score online by pulling a tri-merge report (meaning all three credit bureaus). There are a few sites that let you check and manage your credit report for free. Check out one by clicking here.

First take a look at your score. Most lenders will consider the middle score of your three credit bureaus, this is known as your mid-score. Your credit score can range anywhere from 350 to 850. You typically need over a 600 to get a home loan and over 750 is considered very good credit.

If you're interested in checking your credit score in order to pre-qualify for a loan, please click here to fill out an application and get a copy of your credit report for free.


Apply For an Unsecured Credit Card

After one year of following all of these steps you should be ready to apply for an unsecured credit card. In a lot of cases, the creditor of your secured card can switch you to an unsecured card without having to get a new one. If not, try applying for a credit card through your local bank. There are also credit cards where you can earn back rewards such as travel credit or gift cards. Check out your options and decide what is best for you.

The key to credit is time and patience. It cannot be built overnight. With a little work and practice, obtaining a stellar credit score does not have to be far from reach.

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