How to Build Your Credit History and Score

Buying a home is a big decision, and you might be thinking, “Can I really qualify for a home loan based on my current credit score?” Your creditworthiness can affect how much you can borrow, what interest rate you can obtain and what loan program(s) you may qualify for. But how much can you improve your credit score? Maybe you have questions about what factors affect your credit score, or you aren’t sure where to start. We’ve all been there, and that’s why Vanderbilt is with you every step of the way. Let’s tackle these questions together.

What Goes into a Credit Score?

Your credit score can have slight differences depending on the credit bureau you use, but each bureau’s scoring model calculates your score using percentages assigned to certain financial factors. Some factors may be given a higher percentage based on importance and, therefore, make up a bigger chunk of your total score. For example, your payment history is usually given a higher percentage over newer credit.

These are some typical factors that contribute to your credit score: payment history, total debt, credit utilization, age of credit lines, number and type of credit lines on your report, new credit lines and delinquencies. Check your free credit score to learn more about what factors are being considered when it comes to your specific score. Also, before you apply for a loan, it’s a good idea to review your credit report so you have an idea of what your credit history will look like to a lender.

How Can You Build Credit History?

Do you have little to no credit history? Good news! Whether you are young and starting out or just have very few credit lines open, there are steps that could help you establish more history. We’re sharing some tips to get you started:

1. Try a secured credit card.

With a secured credit card, your credit limit is determined by the required security deposit — the collateral — used to obtain the card. If you’re unable to pay the credit card’s bill, the security deposit can then be applied to the outstanding card balance. There are fees and charges associated with secured credit cards, so be sure to shop around.

2. Take out a credit-builder loan.

That’s right. You can borrow money with the specific purpose of building your credit history. It differs from a traditional loan, as the lender does not give you the loan amount up front. Instead, the lender deposits the amount in a savings account, and the borrower makes monthly payments toward the loan principal and interest to build a strong payment history.

Once the loan is paid in full, the borrower receives the saved money. The amount of the loan is typically very low, but if you decide to get a credit-builder loan, consider the loan amount and the monthly payment you can afford because the lender will report any late payments to the credit bureaus.

3. Become an authorized user.

If you have a family member with a high credit score and a reliable repayment history, they could add you as an authorized user on their credit card. You don’t even have to be issued a card to use; being named an authorized user alone can help build your credit if the primary card holder has and maintains a strong credit rating.

4. Look into nontraditional data reporting.

There are some programs and companies who may use rent or phone payment history to report to credit bureaus. If you consistently pay your rent or phone bill on time, this could be a possible avenue to build more credit history. Note that paying bills does not always help build your credit if the company you are paying does not report payments to credit bureaus.

What are ways to improve your credit score?

If you already have an established credit history, you may be focusing on improving your credit score. Are you ready to boost your less-than-perfect credit? Here are some ways to keep your credit on track:

• Pay your bills on time — Making a late payment may negatively affect your credit score and result in late fees. Any bills that are more than 30 days late will be reported to the credit bureaus.

• Set up automatic payments — This can help you avoid late payments – just ensure that your account balance will cover the payment amount.

• Use credit cards wisely — Pay off your credit card every month so you will avoid fees and interest charges.

• Avoid applying for more credit than you need – Credit applications can appear as inquiries on your credit report, which can look to lenders like you’re taking on additional debt. These inquiries will appear on your credit report for up to two years.

• Borrow or charge what you can afford — Use a small percentage of your credit limit that is within your budget so you know you can pay it back and avoid accumulating debt.

• Keep your main credit accounts open — Having a credit card for a long period of time can help build your history of making payments.

• Check your credit report — Make sure it does not contain any inaccurate or fraudulent information. If you find inaccuracies, you can report and dispute them to the credit reporting company. Crediting monitoring services can also help you track and keep an eye on your score and any changes.

• Talk to a credit counselor — Sometimes we all need help. A certified credit counselor can help you make a plan for managing your debts, create a budget and provide helpful financial education resources.

Remember, if you are having trouble financially, also reach out to your lenders and creditors to let them know your situation. Avoid waiting until the debt has been turned over to collections. Your lenders and creditors may be able to work with you and reduce or change your payment plan or temporarily move the due date so that you can get back on track.

Looking for more credit tips and resources? We offer valuable resources created by the Consumer Financial Protection Bureau that provide you with help to make your credit work for you. Check out this credit workbook with self-evaluation tools, worksheets and steps to take if you’ve experienced identity theft.