If you’re new to credit, or new to financing in general, it’s wise to start building good credit right off the bat. If you’re not sure where to start, we’ve got some tips for you.
Understand credit to start building it
It is important to know that you have two main credit scores: the FICO score and the VantageScore. Your FICO credit score is used the most by auto lenders. In fact, it is the oldest credit scoring model and generally the most widely used credit scoring model.
Your FICO credit score is made up of five categories which each represent a certain percentage of your total credit score.
- Payment history – 35%
- Amounts due – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
When you are new to credit, you can build a solid foundation by taking out loans and / or lines of credit so that your on-time payments contribute to your payment history.
Payment history is most of your overall credit score, and it’s something future lenders are likely to consider when funding or applying for new credit. The more payments you make on time, the more you can use a positive payment history to prove to a lender that you can pay off your debts on time.
Your credit reports keep a seven-year history of your payments, so it’s important to make all of your payments on time to build a good credit score.
The second largest part of your credit score is the amounts owed. This category tracks your loan balances and tracks your credit utilization rate – the amount you owe on revolving credit accounts against their maximum borrowing limit. Revolving credit, like credit cards, can help create credit for new borrowers as long as they are managed responsibly. However, if your credit card balances are over 30% of their limits, they are probably hurting your credit score.
As a new borrower, it is important to start your credit history on the right foot. By accepting new credit that you can manage, making all of your payments on time, and keeping your credit card balances below 30%, you’re on your way to building the good credit you’re looking for!
Accept new credit as a borrower without credit
If nothing is currently reported to the credit bureaus, chances are you have little or nothing on your credit reports for a lender to see. When this happens, you usually start off with a low credit score and as a result, you may feel stuck when it comes to applying for new credit.
Don’t worry, lenders can usually tell the difference between a low credit score due to mismanagement and a lack of credit history.
To help you start building credit, there are different types of loans and services you can consider to help your new credit history, such as:
- Manufacturer credit – These small loans are generally offered by direct lenders such as banks or credit unions. You borrow from the lender, but instead of having the money on hand, the money is placed in a savings account. After you’ve paid everything you owe and the loan is over, you get the money. As the name suggests, these loans are designed to help borrowers build up a credit history, and they are generally easy to qualify.
- Credit reporting services – There is a good chance that you will pay something every month. Whether it’s a streaming service, your phone bill, or your car insurance, you might be able to add it to your credit reports with a credit report service, like Experian Boost. If you’re already paying bills every month, adding them to your credit reports can provide a positive payment history without having to add more to your monthly budget.
- Become an authorized user – To create credit and add positive payments to your credit reports without the pressure and responsibility of payments, you may be able to become an authorized user on someone else’s credit cards. As an authorized user, you get your own credit card in your name and all of the payment history associated with the credit card appears on your credit reports. It is a good idea to become an authorized user with someone who has a good credit rating and is responsible for their credit cards. Everything that happens to the line of credit shows up on your credit report, so if the primary cardholder stops making payments, your credit score will drop as well.
Besides adding items to your credit history, a good way to keep your credit score out of the red is to pay everything off on time. A missed payment on an account – whether currently reported or not – can be sent to a collection agency if the creditor wishes to take that action. A collection account can hurt your credit rating and stain your credit history.
Any missed or late payments can show up on your credit reports, so it’s best to stay on top of all your bills to avoid going from a new borrower to a bad credit borrower.
Do you want a car loan to build up credit?
Many borrowers start their credit history with an auto loan. As a new borrower in the world of credit, traditional auto lenders may be reluctant to provide you with financing. However, subprime lenders often have first-time car buying programs and work with borrowers who have little or no credit.
Auto loans have great credit potential because they are installment loans and typically take 48 to 96 months to pay off. If you make all of your payments on time, that’s four to eight years of positive payment history! It can do wonders for your credit score and show future lenders that you can pay off your debts on time.
However, finding auto finance relationships is not always easy as a new borrower.
If you need a vehicle and your low credit rating is in the way, let Auto Express Credit clear the way and connect to a special financial dealership. Our nationwide dealer network is signed with subprime lenders equipped to work with many unique credit circumstances. Fill out our free auto loan application form, and we’ll find a special finance dealer in your area.