What are the best strategies for building credit from scratch?

Credit scores are typically calculated using a scoring model called FICO, which ranges from 300 to 850, with higher scores indicating better creditworthiness.

About 90% of lenders use FICO scores to evaluate credit applications.

Payment history is the most significant factor in determining your credit score, accounting for approximately 35% of the total score.

Consistently making on-time payments can have a major positive impact on your score.

Credit utilization, which measures how much of your available credit you're using, makes up about 30% of your credit score.

Keeping your utilization below 30% is generally recommended to maintain a good score.

When building credit, becoming an authorized user on someone else's credit card can be beneficial.

This allows you to benefit from their positive credit history without being responsible for payments.

Secured credit cards are an effective way to build credit from scratch.

They require a cash deposit that serves as your credit limit, minimizing risk for the lender while allowing you to establish a credit history.

Credit-builder loans are another tool for building credit.

These loans are typically small, and the borrowed amount is held in a savings account until the loan is paid off, helping you build a positive payment history.

Length of credit history accounts for about 15% of your credit score.

Opening new accounts can lower your average account age, so it's wise to consider the timing of new credit applications.

Hard inquiries, which occur when a lender checks your credit for lending purposes, can temporarily lower your credit score.

Limiting the number of hard inquiries can help maintain a healthier score.

The Fair Credit Reporting Act (FCRA) mandates that you are entitled to one free credit report annually from each of the three major credit bureaus: Experian, TransUnion, and Equifax.

Regularly checking your report can help you identify inaccuracies.

Rent payments can contribute to your credit history if reported to credit bureaus.

Some services allow you to report your rent payments, which can help you build credit without traditional credit accounts.

Credit education is crucial.

Understanding how credit works, including the factors affecting your score, can empower you to make informed financial decisions and build credit effectively.

The age of your credit accounts can be beneficial for your credit score.

Maintaining older, unused accounts can positively influence your length of credit history, even if they are not actively used.

Using a mix of credit types, such as revolving credit (credit cards) and installment loans (car loans, student loans), can improve your credit score by demonstrating your ability to manage different types of credit.

Some mobile phone and utility companies now report payment histories to credit bureaus.

This can provide an avenue for individuals without traditional credit to build their credit profile.

Many employers check credit reports during the hiring process.

A strong credit history may enhance your job prospects as some employers view it as a reflection of responsibility and reliability.

Credit scores can vary significantly between different scoring models and credit bureaus.

It’s possible to have different scores for the same individual due to variations in the data each bureau has.

Federal regulations require that negative items, such as late payments or bankruptcies, can only remain on your credit report for a limited time—typically seven years for most negative marks.

Building credit from scratch can take time.

Establishing a solid credit history might take several months to years, depending on the strategies employed and consistency in managing credit responsibly.

The average credit score in the US has been gradually increasing over the years, reflecting a trend toward more responsible credit behavior among consumers.

As of 2023, the average FICO score was around 714.

Financial literacy plays a critical role in building and maintaining credit.

Individuals who understand financial concepts, such as interest rates and credit terms, are often more successful in managing their credit and finances overall.