Does Layaway Build Credit? And How to Improve Your Score

Layaway is a purchasing method where a consumer makes installment payments on an item over time, with the retailer holding the merchandise until the full price is paid. Once all payments are complete, the customer takes possession of the item.

Understanding How Credit Scores Work

A credit score is a numerical representation of an individual’s creditworthiness, indicating how likely they are to repay borrowed money. These scores are calculated using information found in your credit report, a detailed summary of your financial history.

Three major credit bureaus—Experian, Equifax, and TransUnion—collect and organize financial data. These agencies receive information from various lenders, including banks, credit card companies, and mortgage providers, which is then compiled into your credit report.

Your credit report contains different types of accounts, such as revolving accounts like credit cards and installment accounts like mortgages, auto loans, and student loans. Information about these accounts, including payment history, amounts owed, and the length of your credit history, is used to calculate your credit score. Other factors influencing your score include new credit applications and the mix of credit types you manage.

Why Layaway Does Not Impact Credit

Layaway transactions do not build credit because they are structured as payment plans, not a form of credit or a loan. With layaway, the retailer retains ownership of the item until it is fully paid for, meaning no debt is extended to the consumer.

Retailers typically do not charge interest on layaway plans, although service or cancellation fees might apply. Since no debt is created, there is no payment activity to report to credit bureaus. Credit scoring models have nothing to evaluate from these transactions.

Strategies to Build Credit

One common method involves obtaining a secured credit card, which requires a cash deposit that serves as your credit limit. This deposit reduces risk for the lender, making these cards more accessible for those with limited or no credit history.

As you use the secured card and make on-time payments, this positive payment history is reported to the credit bureaus, helping to build your credit profile. Many secured card programs also offer the possibility to transition to an unsecured card after responsible use. Keeping your balance low relative to your credit limit, known as credit utilization, also positively impacts your score.

Another option is to become an authorized user on another person’s credit card account. When added as an authorized user, the account’s payment history can appear on your credit report, potentially benefiting your score if the primary cardholder manages the account responsibly with on-time payments and low balances. If the primary user mismanages the account, it could negatively affect your credit.

Credit-builder loans offer another structured way to build credit. Unlike traditional loans where you receive funds upfront, with a credit-builder loan, the money is held in a savings account or certificate of deposit by the lender. You make regular payments over a set period, and these payments are reported to the credit bureaus. Once the loan is fully repaid, you receive the held funds.

Regularly checking your credit reports for accuracy is important. By law, you are entitled to one free credit report annually from each of the three major credit bureaus through AnnualCreditReport.com. Reviewing these reports helps identify and dispute any errors that could negatively impact your score.