Building Credit Score from Scratch

Maintaining credit is a tough task, especially under the current economic conditions when there is an economic crisis just on the horizon. Building credit from scratch is even more difficult because it requires being financially disciplined and responsible at an age when we are most carefree.

Before we can look at some tried and tested ways of building a credit report from scratch, let us first try to understand what a credit report is why it is so important to maintain it. As it will not be possible to appreciate the utility of credit building steps without first realising the importance of credit.

What is a Credit Report?

Your credit report is your passport to the world of financial products and services. As soon as a person becomes of age legally and they start using any financial service such as a bank account, payment of utility bills, payment of credit bills or student debt, their credit report starts to build up.

Your credit report is just like your report card. It has all of the details of your financial transactions. How many loans you have taken and repaid, whether you pay your bills on time or not, how frequently you use your credit card and whether there are any bankruptcies or delinquencies in your past or not. It is in simple words a detailed report of an individual’s credit history prepared by a credit bureau.

The credit report is useful for banks and other lending institutions because they can assess the creditworthiness of the individual by looking at their credit report. Credit reports are prepared by the three main credit bureaus in the United States, namely

• Experian
• Equifax
• TransUnion

Lending institutions such as banks and utility providers send an individual’s credit activity such as repayment on loans, bill payment habit to either all three or any of these credit bureaus, to compile an individual’s credit history.

Having a good credit report with a high credit score can allow you access to mainstream financial products and services such as loans, mortgages and credit cards with low-interest rates. A mediocre credit score can still provide access to the products and services but at a higher rate of interest, whereas a low or bad credit score can block one’s access to some of the mainstream financial products and services, thereby forcing one to settle for predatory products and services such as payday and P2P loans.

Building Credit Score from Scratch

Steps to build credit score from scratch

Building your credit score from scratch requires some strategic planning. Why? Simply because when you are young and have no credit history then you can either do it right or go very wrong and regret it later.

It may appear difficult to build a credit score from scratch but there are plenty of ways and as long as you follow strict personal financial management discipline and a proper strategy, you should be fine.

So let us now look at some of the steps for building credit scores from scratch.

1 – Become an Authorized user

This can be one of the easiest ways to start building your credit report. Parents or relatives with long and good credit histories can add you as an authorized user on their credit card. What this will do is that as they continue to use their credit card, it will build up both their credit history and yours as an authorized user for the card.

You do not even need to have access to their card or use it, this, therefore, is the simplest way to start building history.

2 – Get a Secured Credit card

We mentioned above that you need to follow a strategy in order to build up your credit score properly. If you manage to become an authorized user, you do not have to stop there. The next step can be getting a secured credit card to expedite the process of building your credit score.

A secured credit card is issued against cash that the account holder is required to deposit upfront as security or collateral for the credit card. A secured credit card is just like any regular credit card except for the fact that it is secured with a deposit. The key here is not to use it as an ordinary credit card.

A secured credit card should only be used for purchases that can be paid for. The payments should be made in a timely manner so that the credit history keeps on building up. Make sure to choose a card issuer that reports to the credit bureaus, otherwise the whole exercise will be futile.

Secured credit cards are not meant to be used forever. They are supposed to be used only to build the credit, till the cardholder has enough credit to be eligible for an unsecured credit card.

3 – Get a credit builder loan.

This can either be the third or second step of your credit building strategy if you are following these guidelines. Those who cannot become an authorized user can use this as their first step as well.

Credit builder loans are offered by small banks and credit unions, the purpose of these loans is to help individuals with no or low credit history build up their credit score easily. A credit builder loan is a very low-value loan for instance it can be for values ranging between $300 – $1000, depending on the income level of the individual.

A credit builder loan is not like any regular loan, the lender does not disburse the number of funds to the borrower. Instead, the funds are kept in a secured account and the borrower is required to make timely payments that comprise interest and principal.

The funds are released either in proportion to the payments made or at the end of the term when the loan has been completely paid for. In this aspect, a credit builder loan is also like a forced savings option, as at the end of the loan term you end up with the full amount of the loan.

Time payments are essential because these will be reported to the credit bureaus and help your credit score improve. Timely payments through credit builder loans are an effective way of improving the credit score. It must, however, be remembered to make sure that the lender reports to either all three or any of the credit bureaus.

By following these three steps, you can start building your credit score from scratch. Once again it is vital to follow strict financial management discipline. The payments must be paid on time, only affordable expenses must be incurred and any unnecessary expenses should be avoided. Following the three steps mentioned above will not only build up your credit score but they will also open a host of better financial products and services for you.

Building Credit Score from Scratch

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