What Credit Do I Start With to Build My Score?

Credit represents your ability to borrow money or access goods and services with the promise of future payment. Building a positive credit history is important for various financial opportunities, including securing housing, purchasing vehicles, and accessing favorable loan terms. Establishing a strong credit foundation can open doors to financial stability and future growth.

Understanding Credit Fundamentals

A credit score is a numerical representation of your creditworthiness, indicating how likely you are to repay borrowed money. Two widely used scoring models are FICO and VantageScore, which evaluate information from your credit reports to generate a score. Your payment history is the most influential factor, typically accounting for about 35% of your FICO score, highlighting the importance of making on-time payments. Other factors include the amounts owed, length of credit history, new credit accounts, and the mix of credit types you manage.

A credit report, distinct from a credit score, is a detailed record of your credit history. The three major credit bureaus, Equifax, Experian, and TransUnion, collect and maintain this information. Credit reports typically contain personal identification details, a history of your credit accounts including payment status and balances, public records like bankruptcies, and inquiries made by lenders. Lenders use these reports to assess your risk when you apply for credit, loans, or even rental properties.

Getting Your First Credit Product

Secured credit cards are a common starting point for individuals with no or limited credit history. These cards require a refundable security deposit, which typically matches your credit limit, often starting around $200. This deposit acts as collateral, reducing the risk for the lender and making approval more accessible. You use a secured card like any other credit card, making purchases and monthly payments, and this activity is reported to the major credit bureaus to help build your credit history.

Credit builder loans offer a unique approach to establishing credit. Instead of receiving funds upfront, the loan amount is held by the lender in a savings account or certificate of deposit while you make regular payments over a set term. These loans typically range from $300 to $3,000 with terms from 6 to 24 months. Each on-time payment is reported to the credit bureaus, demonstrating responsible financial behavior. Once all payments are completed, you receive the full loan amount that was held, minus any interest or fees.

Becoming an authorized user on someone else’s credit card account can also contribute to building your credit history. As an authorized user, you receive a card linked to the primary account, and the account’s payment history and credit limit may appear on your credit report. This can provide a benefit, especially if the primary cardholder maintains a long history of on-time payments and low credit utilization. However, it is important to choose a responsible primary user, as their negative actions, such as missed payments or high balances, could also negatively impact your credit.

Responsible Credit Management

After obtaining a credit product, consistent actions are necessary to build a positive credit history. Making on-time payments is the most significant factor in credit scoring models. A single late payment, reported after 30 days past the due date, can significantly lower your credit score and remain on your report for up to seven years.

Managing your credit utilization ratio is another important aspect of credit health. This ratio represents the amount of credit you are using compared to your total available credit. It is calculated by dividing your total outstanding balances by your total credit limits across all revolving accounts. Financial experts generally recommend keeping your credit utilization below 30% to positively impact your credit scores, though lower percentages, even in single digits, are considered more favorable.

Regularly monitoring your credit reports is a good practice to ensure accuracy and track progress. You are entitled to a free copy of your credit report from each of the three major credit bureaus weekly through AnnualCreditReport.com. Checking your reports allows you to identify and dispute any errors that could negatively affect your score. Many banks and credit card companies also offer free access to credit scores, enabling you to periodically check your score and observe how your responsible credit habits are contributing to its improvement.