Building a Credit Rating From Scratch

—TechRound does not recommend or endorse any financial practices or advice. All articles are purely informational—

Do you also have a less-than-ideal credit rating (even if it’s considered average in the US)? If so, you might be paying more than necessary to maintain it. Causes for concern: According to the U.S. Federal Reserve,  by the end of 2024, 82% of U.S. adults will have credit obligations (Forbes Advisor). On the FICO score scale, 34.8% of U.S. consumers fall into the subprime category, which is considered “average,” while 16% have bad financial status.

However, while individuals with average credit scores may encounter some restrictions in their financial activities, those with bad credit scores face significant consequences, including high interest rates, limitations on borrowing, challenges in real estate transactions, and maintenance difficulties with credit cards.

Overall, more than half of U.S. debtors have reasons to wonder: how can they improve their borrowing history? An insight into the world of finance on Rates.fm can help answer this question. Your credit rating acts as your financial passport, so it is crucial to understand how to build a solid loan history or reduce overpayments (in dollars or other currency), potentially up to 25% that you’ve been making due to a poor or even average credit score.

Open Your First Credit Card

So, credit history is an indication of the financial capacity of the holder of this one. As your first step into the realm of debt, consider using a secured credit card. The idea is simple: your deposit becomes a pledge of your ability to pay, which determines your borrowing limit, minimising risk for both the bank and you.

For first-time borrowers, the secured credit card option can be a good start to building a successful credit history, opening the door wide to a world of financial opportunity.

How Do I Find Out My Credit Score? 

1. Request a free annual credit report from Equifax, Experian, or TransUnion
2. Sign up for services like Credit Karma or Credit Sesame
3. Some banks and credit card companies provide free credit scores to their customers

Alternatively, you can consider debit cards and prepaid cards. While they’re convenient, they don’t affect your debit card score because they’re not a credit product that requires responsible debt management.

Another alternative is consumer credit, which can offer low interest rates, but operating them requires an expert understanding of credit obligations, the guidance of professional financial advisors, and is often unavailable without a prior credit history, bringing us full circle back to the beginning.

That’s why a secured credit card is an ideal start to your banking history. That’s where the approach of a safety net comes in: the worries such as “I don’t like the idea of a deposit” are relieved with control over one’s finances, and “I’m afraid of using loans” can be put off with a safe start, which isn’t going to rack up debt.

Basically, a secured credit card is step one in financial responsibility. This approach will also be well received by creditors in general, making your financier’s score better. For more information on how to apply for a credit card, refer to the statement from RATES financial analyst Irina Tsymbaliuk.

Pay Your Bills On Time, Every Time

Fulfilling your obligations is a value that forms the basis of your trusting relationship with the outside world in all areas, whether public or personal, including financial. In the latter case, meeting your obligations on time becomes a factor that affects your rating, such as mortgage eligibility.

The point is that even one missed debt payment can lower your rating and make it difficult to get a mortgage in the future. Chronic failure to meet such obligations is bound to have the next consequences:

• Penalties: Accumulating penalties on multiple loans negatively affects your rating and financial capability. Only paying on time will help you avoid the fees
• Limited Access to Financial Tools: A poor credit score not only restricts access but also significantly inflates the cost of essential banking services. Whether you’re seeking a mortgage, renting an apartment, securing car loans, or obtaining insurance, a low credit rating can be a formidable barrier. And when it comes to business loans, it’s often a closed door altogether

For reference, 35% of your FICO credit score is made up of your payment history. But what keeps you from paying your debts on time? Forgetfulness, irresponsibility, or an act of God can cause you to miss a debt payment.

Consider the cash flow conundrum: funds are tight and the due date is fast approaching. The temptation to skip a payment may be stronger than common sense, but this is a bad alternative because delinquencies on credit card or utility bills have a nasty habit of accumulating and irreparably damaging your credit history.

Fortunately, there is a simple solution to this complex problem.

Use Smart Strategies To Meet Your Debt Obligations

The reason for the massive loan defaults in the US was mortgage defaults in 2007-2008. Another reason was securitisation related to the Gramm-Leach-Bliley Act, which limited the overlapping function of commercial and investment banks.

But whatever your reason for defaulting on debt, from personal financial difficulties to a downturn in the global economy, there are proven ways to ensure on-time payments, no matter the circumstances:

• Budgeting: When budgeting, calculate your income and expenses so that you can service and pay off your monthly debts. According to financial analysts at Rates.fm, this allocation should not exceed 43%
• Automatic payments: There is an option in the settings of fintech applications to automate payments. These settings are individualised for each credit card. Automation ensures on-time payments and prevents fraught late payments
• Prioritise: If you’re a seasoned debtor, you likely have multiple bank cards. You may use some for low-interest loans and others for travel rewards and cash back. Prioritise payments to those with the highest interest rates
• Balance: Try to pay off your debit card balance in full each month. This way, you will avoid interest payments
• Ask for help: Know that lenders are not out to ruin you. If you have financial difficulties, it happens to everyone sooner or later, then contact your creditors, they will help you find both short term solutions and long term strategies

Chief among these strategies are debt budgeting and payment automation. Remember that this seemingly mundane task of paying your bills on time is very important. It’s not just about avoiding late payment penalties; it’s about protecting your financial reputation, whose impeccability opens up a world of financial opportunities.

Building solid credit from the ground up is less about correcting financial mistakes you’ve already made and more about unlocking your future potential. Start your credit history with a secured debit card, which shows future lenders that you are responsible with your money. Pay each of your bills on time; this signals your predictability.

You will be rewarded with a cumulative effect that will build a solid foundation for your financial well-being for years to come. Lower interest rates, longer grace periods and better credit terms will lead you to financial freedom through discipline. 

—TechRound does not recommend or endorse any financial practices or advice. All articles are purely informational—