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How to Build Your Credit from Scratch

Having good credit is important for a variety of reasons. In short, your credit score is an indication of how likely you are to repay debt and how well you manage your finances. It’s a major deciding factor in whether you qualify for a mortgage or auto loan and can even affect your career in some cases. Whether you’ve recently turned 18 and are starting from the beginning, or you’re simply looking to complete a full credit 180° and entirely transform your current credit score, there are several steps you can start taking today to help you prepare for the future.

1. Apply for a credit card. If you do not have credit, you may be required to open a secured credit card, which requires you to make a deposit upfront. Depending on who you open the card with, the bank or credit card company will hold onto this deposit and use it as collateral in case you miss a payment. If you make your payments on time every month, this deposit will be returned to you, as your timely payments will be reported to the credit bureaus, thus improving your credit score and demonstrating to lenders that, while you are just beginning to build your credit score, you are also a reliable borrower.
2. Take out a loan. Don’t take on debt just for the sake of building credit, but if you can make the monthly payments in full and on time, and you need a loan for a valid reason, getting a loan is an effective way to build and improve your credit score. Purchasing a used car or funding a college education are two of the most common types of loans that can help you build your credit, especially if you are young.
3. Pay your bills on time. With 35% of your FICO score being based on your payment history, paying your bills on time or, better yet, ahead of time is important. Whenever possible, pay your bills in full, rather than just the minimum required payment. In doing this, you eliminate your debt before it has a chance to accumulate much, if any, interest. If you have a hard time remembering which bills are due and when, set up automatic payments from your checking account, or set recurring email or text alerts to remind you to make your payments each month. For more information about credit scores and the FICO formula, be sure to check out our Credit Score 101 blog.

It’s important to keep it simple in the beginning. While you may be eager to start building your credit to prepare for larger purchases in the future, such as a home or a newer vehicle, start small for now until you get the hang of making payments and tracking your score. Taking on too many debts at once can have a negative impact on your score before you really get the chance to improve it, and falling behind on payments can become all too easy, especially if you have multiple payments due at varying times during the month.

If you have questions about credit scores, how to build yours, and how Valley’s Visa® credit card can help you improve your score, or if you’re interested in applying for a loan, give us a call or stop into your local Valley branch to speak with one of our member representatives or loan officers today!