There are few factors as important to one’s financial well-being as a good credit score. Your credit score is based on factors like your credit utilization rate, how timely you are with rent payments and other recurring expenses, how often you get a new credit card, how much available credit you have, and more.

Your score determines what loans you’ll be approved for, how many credit cards you can have, and how easily you’ll be able to make big purchases like buying a house.

We all start with 0 credit. Many of us also suffer financial misfortunes that cause our credit scores to plummet. Regardless, you can learn how to build credit with this beginner’s guide. The strategies discussed within will show you how to build up your credit from scratch or help it grow from a low number. Let’s begin!

What Affects Your Credit Score?

Your credit score could be affected by a wide range of factors and behaviors. Recall that your credit score is a broad indicator of your general creditworthiness. Lenders use your credit score to figure out how reliable a borrower you will be or how likely you are to repay debts you take out.

To determine your credit score, lenders and credit bureaus look at different factors and weight them differently based on their algorithms. For example, the FICO Score system doesn’t take credit utilization into account as much as the VantageScore system, although both consider it to some extent. 

Let’s break down some of the more important elements that affect your credit score.

How Payment History Affects Your Credit Score

Naturally, your past payment history affects your credit score for good or bad. Your payment history includes both how many payments you have made in the past toward debts or lines of credit and whether those payments were both:

  • On-time payments
  • In the right amounts 

Say that you have a few utility bills, one credit card, and a mortgage. If you pay all of those bills on time and in the required minimum amounts, your payment history will look positive, and it will positively impact your credit score. 

In contrast, if you miss your utility bills or don’t make your mortgage payments on time, your credit score will decrease. For both the FICO and VantageScore systems, payment history is the most important factor when determining creditworthiness. 

Therefore, if you want to increase your credit score, make payments on time and regularly. If you have debts or loans, paying off those loans more quickly will also increase your credit score. That’s why it’s so important not to take out extra loans or lines of credit if you can’t afford them. 

Even if these financial tools give you some financial breathing room for a little while, they will negatively impact your credit score sooner than you think.

How Does Debt Impact Your Credit Score?

Your current amount of debt also impacts your credit score significantly. Your total debt includes: 

  • The combined total of money you were loaned, including a mortgage loan, auto loan, or other personal loans
  • Your used credit (not the total credit you have under your name, but how much of those lines you actively utilize)

If you have less debt overall, your credit score will likely be higher. That’s because the credit bureaus know that it’s easier for someone with less debt to pay off a new loan or line of credit than it is for someone with lots of debts. 

Due to this factor, you should avoid taking out loans or lines of credit that you don’t absolutely need. Doing so could hamstring your attempts to take out another loan in the future or be approved for an important loan, like a mortgage.

Does a Mix of Credit Improve Your Score?

In addition to the above factors, your credit mix may impact your credit score. Your credit mix broadly describes the types of debt or credit you have taken out so far. Types of credit can include: 

  • Lines of credit, as often seen for credit cards or secured credit card(s)
  • Mortgage loans
  • Personal loans
  • Auto loans or other vehicle loans
  • Furniture financing loans
  • And more 

If you have a good credit mix with a lot of variety, you will have a higher credit score than otherwise. In contrast, if your credit or debt is made up of one type, your credit score will be lower. 

The credit bureaus use credit mix to determine whether you take out loans wisely and responsibly. For example, if you have a lot of personal loans, that could indicate that you don’t know how to save up for big purchases. 

But if you have one mortgage, one car loan, and then a personal loan for something else, it indicates you know how to use debt and loans for the right reasons. This factor doesn’t matter as much for your credit score total as payment history, but it is still important.

What Happens When Someone Pulls Credit?

It’s also not a good idea to take out debt or loans for no reason because most of those require hard credit checks/credit inquiries. Also called “credit pulls”, these can negatively impact your credit score. 

Before you are approved for a loan or credit card, the lending organization wants to check out your credit report to see your borrowing track record. They usually make a so-called hard credit check. This means they take an in-depth look at your borrowing history to see what bills you currently pay, your debt total, your credit utilization ratio, and more. 

A hard credit check is contrasted with a soft credit check, which occurs when you check your own credit score or during loan prequalification. 

But why does a hard credit check affect your credit score? In short, it lets the credit bureaus know that you are planning to take out more debt, so it reflects negatively on your credit score. Note that this negative effect is relatively mild. Your credit score will probably decrease by only a few points. 

Furthermore, hard inquiries may stay on your credit report for two years, but they only diminish your score for a few months at most. Therefore, hard credit checks penalize you a little bit, but not for very long and not very much. 

You’ll only be heavily affected by credit pulls if you apply for and are approved for multiple loans simultaneously. Lots of credit bureaus don’t like it if you try to take out lots of loans at once. Thus, your credit score may decrease by a dozen points or more if you open up several lines of credit in rapid succession. 

Once more: take out debt or loans sparingly and only when necessary. That’s the best way to make sure your credit score stays high throughout your life.

What Are the Three Major Credit Bureaus?

The information for your credit score is collected and then compiled by the three major credit bureaus: Experian, Equifax, and TransUnion. These are major crediting companies that receive data from credit furnishers (i.e. any companies that collect regular payments from you, such as utility companies). 

The three major credit bureaus have separate, internal scores they use to determine creditworthiness. Depending on the lender you contact, one or another credit bureau’s score could hold more weight for the approval decision.

Experian Credit Scores

Experian’s credit scores are formulated by looking at detailed consumer borrowing habits. They receive their reports from mortgage companies, credit card companies, auto financing companies, and more. They receive information like outstanding debt, pay histories, and so on to formulate their reports. 

Experian’s credit scores are a little more complex and detailed than the standard FICO Score. They include detailed reports of borrower credit history, including notes on every debt that the person may have owed for over a decade or even further back. 

However, like the other three individual credit scores, Experian’s credit scores are rarely used by themselves to determine credit worthiness or whether someone will be approved for a loan.

Transunion Credit Scores

TransUnion makes credit reports with a proprietary scoring model that isn’t known to anyone else. However, it’s likely that the credit scores are calculated using many of the same attributes and factors used to calculate general use credit scores, like FICO Scores. 

Generally, one’s TransUnion credit score is very similar to their FICO Score, but not identical.

Equifax Credit Scores

Equifax also formulates its own credit scores for internal use and for calculating the FICO/VantageScore credit scores. Unlike those two systems, Equifax’s credit scores are set on a range of 280 to 850. But they utilize very similar criteria compared to the FICO system for calculation. 

Because of this, a high Equifax credit score usually means you also have a high FICO score. 

As you can see from these breakdowns, it’s important to improve your credit scores with each of the three credit bureaus by following some of the strategies below. 

Building Credit: Where To Start

Whether you are recovering from bad credit or are building credit for the first time, there’s good news. There are lots of ways to build credit and open up your financial opportunities.

Good Credit Cards for Building Credit

For starters, be sure to open up credit cards from good companies and start building credit that way. Student credit cards or credit building credit cards: 

  • Have hard limits on how much money you can spend
  • Don’t usually have high credit limits 

However, such credit cards are offered by companies that regularly report to the three big credit bureaus. Therefore, you can use these credit cards to make moderate purchases, then pay off your lines of credit regularly. Once you do so, that information will be reported and your credit score will increase as a result. 

These credit cards are also great since they are fairly secure, come with low or no fees, and have other benefits. In truth, these are some of the best tools to build up your credit at the beginning of your financial history, such as just after graduating high school.

Secured cards may also be smart. These cards require a security deposit but offer steady credit card accounts that you can then use to build credit. Alternatively, see if you can become an authorized user for someone else’s credit account. A credit union or similar card issuer is likely to have these kinds of card options.

How To Pay Off Debt

However, you may also need to knock out some debt to significantly increase your credit score. To do this, use tools like: 

  • Debt consolidation loans, which consolidate different debts into a single loan payment and interest rate. Not only does this immediately pay off any outstanding loans aside from the debt consolidation loan, but it simplifies the payment process for future prosperity
  • Debt counseling centers, which can help you develop good debt repayment strategies

Is Financing Good for Credit?

It’s not usually a good idea to finance furniture or other big purchases while trying to build credit. Many financiers use credit scores or perform hard credit checks before you’ll be approved, which can decrease your score in the short term. 

For example, if you really need to buy furniture for your new house, like a beautiful Jorstad Nightstand, consider leasing it with Becca’s Home instead of going for a traditional financing contract.

How Setting Up Autopay Can Help With Credit

One last tip: set up autopay for any recurring bills, like utility bills and credit card payments. Autopay controls funnel money directly from your bank account to the bills when they’re due, so you never forget and never have a missed payment on your credit record. 

It’s a small step, but it can do wonders for improving your credit score over the long term.

The Bottom Line

Building credit is always a good idea, especially if you want to enjoy as much financial opportunity as possible. A great credit score allows you to take out big loans, finance expensive purchases, and more. 

However, you don’t need to worry about credit whatsoever if you need furniture for your home fast. You can visit our store instead! We offer leased furniture agreements, through which you lease furniture and pay it off over time. You can even purchase your furniture ahead of schedule! 

Becca’s Home makes it easy to get the furniture you need or want without worrying about credit checks or credit scores. 

Sources:

How Payment History Impacts Your Credit Score | myFICO

What is a Credit Mix? – Benefits of Credit Diversity | Equifax®

What Is a Hard Inquiry? | Experian

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