Credit 101: How to build your credit

man holds credit card while on his laptop

A credit score is a number that determines your overall financial wellbeing – with the power to grant individuals either expansive or limited access to funding. In fact, the United States' economy relies extensively on credit scores to determine access to financing as well as employment, housing, and more. But it's not a system that is equally inclusive to all.

It is estimated that 45.4 million Americans (almost 20 percent of the population) have “unscored” credit records or are “credit invisible.”  Having no credit or a low credit score limits financing opportunities and forces individuals to pay more in interest at higher rates.

A credit score does not define the likelihood of an entrepreneur's business to succeed, or their ability to grow their credit. In fact, it's never too late to build your credit score or set out on a path to improve it.  By taking positive steps now you can position yourself for future success. 

Below you will find the basics on how credit is scored and reported – in addition to action steps on how to improve your score.

What determines a person's credit score?

A credit score is determined by a number of different financial factors, starting with understanding your current and past credit sources. The most influential factors beyond that include your payment history and outstanding debts.

These five factors combine together to determine the overall score:

  1. 35% Payment History  Your account repayment history including any delinquencies, collections, and public records.  How well you repay your debts is the biggest driver of your score.
  2. 30% Outstanding Amounts Owed  This includes how much you owe on your accounts and the amount of available credit you are utilizing.  Having balances above 30% of your total credit limit on credit cards or other lines of credit will weigh down your score.  How much debt you have is the second biggest driver of your score.
  3. 15% Length of Credit History – This measures how long ago you opened your credit accounts.  In general, the longer the credit history, the better.
  4. 10% New Credit Opened  Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
  5. 10% Types of Credit in Use  The mix of accounts you have, such as revolving (credit cards), home mortgages and installment loans (e.g., car loans).

Can I build credit without a Social Security Number (SSN)?

Credit is important for people living in the United States. For this reason, creditors may work with people who do not have social security numbers. A SSN is only one of the unique identifiers necessary to match credit account information to an individual’s credit file. Having a SSN, however, may increase the accuracy of the credit bureaus’ matching process, but it is not always essential.  If you get a new SSN, it should automatically become associated with your consumer’s credit file, but you should always confirm this with your creditors.

Residents who hold Individual Taxpayer Identification Numbers (ITINs) cannot use this number for credit reporting, as ITINs are used specifically for tax purposes. You can use other identifying information such as your name and addresses to match in the credit bureau systems and build your credit.

What is a good credit score?

There are differing credit scoring models that can determine your overall score. Typically, credit scores fall into one of four categories ranging from fair to excellent.

  •  Fair scores: 580 to 669
  • Good score: 670 to 739
  • Very good scores: 740 to 799
  • Excellent: 800+

If your score is below good or even fair, there is always room to improve it. The trickiest part about credit is that it takes time to build and improve but can take only one faulty move to damage it.

How can I begin to improve my credit?

Your first step is to find out where you stand with your credit history. You can request a free copy of your credit report from the three major bureaus at AnnualCreditReport.comWhile these reports do not include credit scores, they will show all records being reported for you, including any that may be hurting your credit. If your credit is less than fair, it's essential that you do some work to understand the problem. Once you've discovered the root of the challenge it's time to make a plan to improve your credit. Research and utilize a debt repayment strategy to reduce balances on your loans and pay down debt. 

Our plan is simple from here: address, improve, maintain. You should clean up and address any adverse or negative items affecting your score, and then improve your credit with a strong usage and payment history. Credit building takes time and requires timely payments, which are then reported to the three credit bureaus.  From there, you will need to maintain your good payment habits and keep going in the right direction. Credit building takes patience but rewards you with lower rates and payments in the future.

What mistakes should I avoid along the way?

Credit is something that can be scary to address knowing that many people are not aware of all the factors that influence their score. Here are our top five tips to keep you and your credit on the path toward success:

  1. Credit cards are fine to use, but avoid carrying high balances, since these often have high rates of interest. Remember to shoot for less than 30% of your total credit limit. When you can pay off your full credit card balance each month, you generally avoid paying any interest while still gaining the rewards of improved credit scores as well as any credit card incentives.
  2. Having fewer accounts is better – if you have a surplus of accounts, there is no need to close them, just pay them off.  1 or 2 credit cards is sufficient.
  3. Credit building takes time – the longer your bad history is behind you, the better. Remember that credit building is a marathon, not a sprint.
  4. Use debt only as needed – if you don’t need it, don’t use it.  Use credit only as a tool to move your financial well-being forward.
  5. Be smart with how many times you request hard pulls on your credit each year.  Shopping for the best rate when you need credit is smart, and most credit score models count all requests on the same day together. Otherwise, applying for new debt many different times during a short period can temporarily impact your credit score. Don't forget – you are entitled to a free report annually.

Mercy Corps Northwest 

Want to learn more about your credit, creating an improvement plan, and bettering your access to funding? We are here to help. From Portland to Seattle, we offer credit workshops to help you get on the path to a better credit history. Once you complete the class, you will also become eligible for a Credit Builder Loan

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