It may feel like you need a cipher to demystify your credit score, but its primary job is to show lenders how good you are at managing debt. Your score begins to represent much more, however, when something important is on the line -- like an apartment or auto loan. Fortunately, if you have below-average or no credit, the steps you need to take to improve your situation aren't very complicated -- but they will require a little patience.
How your credit score is calculated
Your credit score is calculated based on the information in your credit report. Each person has three credit reports -- one from each major credit bureaus, Experian, Transunion and Equifax -- and each score might range slightly. However, FICO, the most widely used credit scoring system, uses the same formula to determine a credit score regardless of which credit report it is using.
There are five categories that affect your credit score:
- New credit (10%): This refers to new credit cards, loans, mortgages or other lines of credit opened.
- Length of credit history (15%): The longer you've had a line of credit, the better.
- Credit mix (10%): There are two types of credit -- revolving credit (credit cards) and installment credit (mortgages, auto loans, student loans, etc.). You want a healthy mix of both.
- Credit utilization (30%): How much debt you hold versus how much credit is available to you. A good credit utilization rate is 30% or below -- to calculate yours divide your total credit used (debt) by your total credit limit. If you have $3,000 in credit card debt and have access to $10,000 in credit, your utilization rate would be 30%.
- Payment history (35%): This captures your history of making payments on time.
How to build credit if you don't have any credit accounts
When you start on your credit-building journey, it may feel challenging to get the ball rolling. A credit card is the fastest way to build credit, but you need credit to get it. Fortunately, there are a few things you can do.
Apply for a secured credit card
Ais generally easier for those with no credit to get approved for because you provide cash upfront to secure the card. Most secured cards use this security deposit as your credit limit -- a $500 security deposit would give you a $500 credit limit -- but there are a few that will offer limits higher than your deposit. Minimum deposit amounts vary by company. For example, the BankAmericard® Secured Credit Card* requires a minimum security deposit of $200, but the Capital One Platinum Secured Credit Card only requires $49, $99 or $200, depending on your credit history.
You'll use your secured credit card like a traditional credit card. You can shop online, buy groceries, or pay for gas with it. Each month, depending on your activity, you will make a payment. Both on-time and late payments are reported to the three major credit bureaus (TransUnion, Equifax and Experian). Secured credit cards are like unsecured credit cards in that if you don't pay back the entire balance each month, interest will accrue.
Credit card companies like secured credit cards for borrowers with low or no credit because there is zero risk. Should the borrower not make a monthly payment, then the funds can be recouped from the deposit. The amount of time it takes for cardholders to bump up to an unsecured card varies, so be sure to keep an eye on your credit score.
Build credit with a credit card
It's not impossible to get approved for a store or traditional credit card that doesn't require a deposit with no credit history. Store cards tend to be easier to get approved for and can help you begin building credit until your score is high enough to qualify you for a regular credit card. If you're opting for a traditional credit card, it's best to focus onand those geared to those without credit. A few options that may cross your path include:
- Aspire® Cashback Rewards Credit Card
- Fortiva® Mastercard® Credit Card with Cashback Rewards
- Applied Bank® Unsecured Classic Visa® Card
- First Access Visa® Credit Card
If you're not approved on the first try, it can be helpful to wait until the creditor explains their decision. You'll receive a letter in the mail listing reasons why your application wasn't approved. From there, you can understand what to work on or look for a card that has better approval chances for someone in your credit score range.
Become an authorized user
If a family member, spouse or friend has good credit, you might consider asking them if you can become an authorized user on their credit card. You won't have to make charges on the account -- though the cardholder can order a card for you if they wish -- to benefit. As an authorized user, every time the cardholder uses their card or makes an on-time payment, it will boost your own credit profile.
Just make sure you choose a cardholder who uses their credit responsibly. If they're consistently late making payments or max out their cards, this behavior will also reflect on your credit report.
Get a co-signer
If you're really struggling to get approved for a credit card or loan, you can consider asking a creditworthy friend or family member to cosign your application. A co-signer with a good credit score can help you qualify for financing. Just be sure to use your new credit responsibly -- any missed payments will impact your credit score, as well as your co-signer's.
Apply for a credit builder loan
A credit builder loan can help anyone with low to no credit improve their credit score. But, it's not a loan in the traditional sense. Instead of receiving the money upfront, the money you request to borrow is held in a separate account. Each month you'll make payments towards this loan and every month your lender reports your payment history to the credit bureaus. It isn't until the loan is paid off that you receive access to the funds.
The only requirement for a credit builder loan is a steady income. You don't need a co-signer or minimum credit score.
You'll pay interest on the loan and it must be paid off by a specified time frame, which is usually 24 months or less. Some credit builder loans earn interest while the money is sitting in an account, but the amount is never more than the amount you'll pay in interest.
Have your bills added to your credit report
Bills such asand utilities can also be added to your credit report through third parties for a monthly fee. There are a few companies out there that do this, such as LevelCredit, Rental Kharma, RentTrack and PayYourRent. Each company charges a different amount and offers a slightly different service, so do a little research before you decide which one you want. Just be sure your utility payments are on time, otherwise you could end up worsening your credit.
Experian also offers bill reporting through a service calledand it is 100% free. The drawback is that Experian Boost will only affect your Experian credit score. It will not affect your TransUnion or Equifax scores. However, the jump you might see in your Experian credit score could happen the same day.
How to build credit once you have a credit history
Once you have gained access to credit accounts, follow these strategies to improve your credit score even more.
Apply for a new credit card
If you have a credit card that you are using responsibly,could improve your credit score even further.
When you apply for a new card, you will see your credit score dip by approximately five points because of the hard credit check. But, if you're approved, your new available credit line should increase your utilization rate -- one of the factors that determine your credit score -- and help boost your credit.
We don't recommend opening too many accounts in a short amount of time. This can cause your score to dip from hard inquiries and could signal to lenders that you're in financial distress and may not be able to pay back your debts in the near future.
Request a credit limit increase
Similar to opening a new credit card, asking for a credit limit on an existing card increase will improve your utilization rate, which usually boosts your score. You should be able to request an increase online, but you can also call your credit card company to ask. It's best to do this once you've demonstrated a pattern of healthy credit usage -- on-time payments for at least six months -- to increase your chances of being approved for a higher line of credit.
Pay balances in full each month
Keep your debt low and your available credit high to increase your score. The best way to do this is to pay off your card's balance in full every month. To make sure this happens, only charge what you are able to pay off by the payment date.
You also want to ensure you're paying on time to prevent being dinged for a late payment -- and incurring late fees. Enrolling in AutoPay is an easy way to make sure you never miss a payment.
Build -- or rebuild -- your credit fast
When it comes to building credit fast, the key things to remember are to pay down your debt, make your payments on time and periodically ask for a credit line increase. Do these three things and, over time, your score will get to a point where you don't have to think about it anymore.
*All information about the BankAmericard Secured Credit Card has been collected independently by CNET and has not been reviewed by the issuer.
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