If you plan to borrow money, your credit score plays an important role. That’s because lenders use your credit score to understand how you’ve handled borrowing in the past, like whether you pay on time and how much debt you already have. Read on to learn how your credit score works and some ways to improve it before you apply for a loan.
What is a credit score?
A credit score is a three-digit number that shows how you’ve managed borrowing and repaying debt in the past. This score comes from your credit history, which shows:
- How long you’ve had credit
- How much you currently owe
- Whether you pay on time
- How many times have you recently applied for credit
Credit scores usually range from 300 to 850. A higher number means you’ve been handling your credit well. That’s why scores between 800 and 850 are considered good to excellent. In fact, a higher credit score may help you qualify for personal loans with better terms and more choices because it shows lenders that you’re likely to repay on time.
How to build a credit history for the first time
Not having a credit history only means you haven’t had the chance to start building credit yet. But there are safe and practical ways to build one from scratch, so you can get more financial options in the future:
Apply for a secured credit card
A secured credit card is a starter credit card that uses a small deposit as security. With this type of card, you can put down money, such as $200, and that amount becomes your credit limit. You then use the card for small, everyday purchases like gas, groceries, or a phone bill.
Because you’re using your own deposit, it’s easier to qualify for a secured card even if you haven’t borrowed money before. It gives you a safe way to show you can borrow and pay back responsibly without taking on more than you can handle.
Every time you make a payment on time, that information is reported to the credit bureaus. Over time, those on-time payments help you build a positive credit history. Once your credit grows stronger, you may qualify for unsecured credit cards or loans with better terms.
Ask for a co-signer
If someone you know has a good credit record, such as a parent, grandparent, or close friend, ask them to co-sign a loan or credit application with you. Their credit history would help you qualify, and both of you would be responsible for repaying it. But make sure to co-sign with someone you trust, because any missed payments can affect both of your credit scores.
Become an authorized user
You can also build credit by being added as an authorized user on someone else’s credit card. For example, a parent, sibling, or partner can include you on their account. This way, you don’t even need to use the card yourself. When they make on-time payments, that positive history can also show up on your credit report, helping you grow your own score over time.
Get a student credit card
If you’re in school, a student credit card may be a good place to start. These cards are for beginners who are new to credit, and you’ll need to show proof that you’re enrolled in school. Your credit limit will usually be small so that you can manage it easily. Once you start using the card for small purchases and pay them off on time, this will build a steady credit history.
How long does it take to build credit?
If you start from zero, building credit usually takes about 6 months of consistent, on-time payments before your first credit score appears. During that time, you’ll need at least one account, like a credit card, that reports your payments to the credit bureaus.
After that, your credit score can keep growing as you keep making steady payments and manage your accounts responsibly. Once you have a strong credit history, you can explore personal loan pros and cons to understand how they can help you reach your financial goals more smoothly.
How to improve your credit score
Here are some simple steps that can increase your credit score before you apply for a loan:
Make your payments on time
Your payment history makes up a big part of your credit score. Even one late payment can lower it. But when you pay on time, lenders know that you’re dependable. Setting reminders on your phone or using automatic payments can be helpful, as these methods can help you keep track of deadlines more easily.
Keep your balances low
Using too much of your available credit may lower your score, even if you always make your payments on time. This is because your credit utilization ratio (the amount of credit you use compared to your total limit) plays a big role in your credit score. Lenders like to see that you aren’t using your entire credit limit, so a good rule of thumb is to use less than 30% of that limit.
Avoid applying for too many loans at once
You may think getting more credit cards will help your credit score, but it’s usually the opposite. If you open several new accounts at once, it could slightly lower your score. Each new loan application shows up as a hard inquiry on your credit report, and too many of those in a short time may make lenders worry that you’re taking on more debt than you can manage. That’s why it’s better to keep the cards you already have and use them carefully.
Keep older accounts active if possible
The longer your credit history, the better it looks to lenders. So, if you have an older credit card you don’t use often, keep it active.
Pallavi Singal is the Vice President of Content at ztudium, where she leads innovative content strategies and oversees the development of high-impact editorial initiatives. With a strong background in digital media and a passion for storytelling, Pallavi plays a pivotal role in scaling the content operations for ztudium’s platforms, including Businessabc, Citiesabc, and IntelligentHQ, Wisdomia.ai, MStores, and many others. Her expertise spans content creation, SEO, and digital marketing, driving engagement and growth across multiple channels. Pallavi’s work is characterised by a keen insight into emerging trends in business, technologies like AI, blockchain, metaverse and others, and society, making her a trusted voice in the industry.
