Building your credit score in the USA takes time and requires responsible financial behavior. Here are some steps you can take to start building your credit:
1. Get a secured credit card: If you’re new to credit or have poor credit, you may need to start with a secured credit card. With a secured credit card, you’ll put down a deposit that serves as your credit limit. Use the card responsibly and pay it off in full each month.
2. Apply for a credit-builder loan: Another option to build credit is to apply for a credit-builder loan. These loans are specifically designed to help people build credit. You’ll make monthly payments toward the loan, and the lender will report your payments to the credit bureaus, which can help improve your credit score.
3. Keep your credit utilization low: Credit utilization is the percentage of your available credit that you’re using. A high credit utilization can hurt your credit score, so it’s important to keep it low. Ideally, you should aim to keep your credit utilization below 30%.
4. Make on-time payments: Your payment history is the most important factor in determining your credit score, so it’s crucial to make on-time payments. Set up automatic payments or reminders to ensure you never miss a payment.
5. Monitor your credit report: Check your credit report regularly to ensure there are no errors or fraudulent accounts. You’re entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year.
Remember, building your credit takes time, so be patient and consistent with your efforts.
Why is your credit score so important to lenders?
A credit score is the best way a lender can assess the person asking for a loan. It is a criterion that can show you if you are a responsible borrower, if you pay on time, if you always pay, if you manage to honor your commitments or are more likely to leave lenders high and dry.
Think about it. You would probably be hesitant to lend money to a friend who usually takes forever to repay – or never pays at all.
Lenders rely on credit scores as an indication that you will meet your obligations. A higher credit score, experts say, assures creditors that they will be repaid.
Your credit score is most often calculated with the FICO scoring model that uses the information in your credit reports, which are compiled by experts. Your reports include the history of your payment habits.
What credit score do you need to get the best mortgage rates?
A credit score of over 700 will usually get you a lower interest rate, and while you may qualify for certain loans with a score lower than 680, the lowest rates are above 700 points.
Each lender has their own criteria and sets a standard of scoring to evaluate you, but normally the classification levels follow this pattern:
Bad Credit: 300 – 629 points
Average Credit: 630 – 699 points
Good Credit: 700 – 739 points
Excellent Credit: 740+ points
The lending industry raises the credit score scale in 20-point increments and adjusts the rates offered to you each time the score increases or decreases by approximately 20 points.
This means it’s no use building your credit to get a good loan rate and then relaxing when it comes to payments. The fee tracks your score as long as the debt is active.
