How to go from Scratch to a Great Credit Score

There are many reasons why you might have your credit score checked. From renting an apartment, or buying a car, to anything that requires you to borrow money from a third-party organization because you don’t have the cash on-hand.  

Why you need a credit score 

Your credit score is the reflection of how you have managed money in the past that has been lent to you, and acts as a predictor of the type of borrower you’re going to be. It is a gauge for lenders to try to understand how reliable and punctual you will be with your payments. If you don’t have a credit history, the journey of building a great credit score can feel overwhelming. The encouraging news is, everyone has had to build their score from nothing, just like you! 

The chicken and egg 

It is hard to gain credit if you don’t have a long history showing you can repay loans, but you can’t have a credit history if you’ve never been a borrower. Therefore, it can be a bit of a chicken and egg situation.  

Building credit does require some time and patience, but the longer you have a credit account open and in use, the better it is for your score.  

A credit score is typically between 300 and 850. The higher the score, the more reliable a lender will see you as, and the higher the chance that they will approve you to borrow money. If you don’t have a credit score, there are a few ways to build a score from scratch.  

Overdraft to up your score 

Certain bank accounts will allow you to borrow more money than you have in your account. This is called overdraft. It is normally a small amount which allows you to build credit even if you never use it – in fact, it’s best if you never do. Overdrafts can have high interest rates attached to them, so using it can be costly. Getting approved shows that your bank sees you as a responsible borrower, even if you never dip into the overdraft.  

Credit cards  

Start building your credit score as early as you can by applying for a credit card. There are many cards that are specifically for first time credit users. When looking for a card, do your research and limit your credit card applications. Once you have a card, use it to make small, everyday purchases. Be sure you don’t stretch your limit.  

Pay off your credit card in full every month. An easy way to do this is to set up automatic payments. Have your credit card payment withdraw from your bank account on the due date each month. This way your statement will be paid in full and on time which will help build your credit faster. Build a consistent monthly history of on-time payments to show lenders and creditors that you can borrow responsibly. 

Your payment history is the single most important factor for your credit score. To improve payment history, remember to: 

• Always make your payments on time 
• Pay the full amount  
• Contact the lender right away if you think you’ll have trouble paying a bill  
• Even if a bill is in dispute, make the payment and sort out the details after  

Important note: You can pay the minimum monthly payment on a credit card without affecting your credit score, but you will incur interest. High interest. This can lead to owing much more than you thought and having your debt build up more quickly than your credit score. 

Diversify your credit  

Having more than one type of credit helps build your credit score. Having a mix of credit can help your score grow. Just be sure to not take on too much debt at one time and to pay off all your payments on time, every time.  

Types of credit include: 

• Revolving credit: This is the most common type of credit. It includes credit cards, home equity, personal and business lines of credit. They have a set limit that you can draw upon, repay and then spend again.  
• Installment credit: This type of credit comes in a lump sum with fixed, scheduled payments until the borrowed amount is paid back in full. Some examples include student loans, auto loans and mortgages.  
• Service credit: Through cell phone bills, heat, electricity, water and similar services, we use service credit everyday. It is the type of credit where you use a service and get billed at the end of the month based on your usage.  
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Using borrowed funds  

Many lenders like to see a borrower that doesn’t tap into their full credit limit. This shows that you aren’t over-extending yourself financially. If you use most of your credit each month, banks and lenders can see your usage as a risk. This can be true even if you pay off the amount in full each month. Add up the amount of all your available credit including credit cards, lines of credit and loans. A good rule of thumb is to stay under 50% of your available limit while building your score.  

Once you have a history of paying your borrowed funds off every month you can apply for a better credit card and bigger loans. A better credit card could offer lower interest rates along with rewards and cashback!  

The road to a great credit score 

The longer you use different types of credit and pay it off on time, the higher your credit score will climb. Keep an eye on your credit score and watch it grow!  

We are here to help you find the best credit building option available to you. Talk to an expert today to make a plan towards a good credit score.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.