How to build your credit before you borrow
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Looking to borrow but not feeling confident about your credit score? Luckily, there are some straightforward steps you can take to build credit that could put you in a better position to apply for a new loan or card down the road. The higher your score, the better your borrowing rates and terms tend to be—and the less money you’ll have to repay later.
So, what can you do to increase your score? We’ll jump into a few tactics soon, but first, let’s take a quick look at how credit scores are created.
Credit scores—a brief overview
There are 3 primary consumer credit reporting companies in the United States—Experian, Equifax, and TransUnion. These companies collect and receive data on hundreds of millions of consumers, and they organize all this information to create and sell credit reports.
A credit-scoring model takes the information in a credit report and generates a number that represents the likelihood that an individual will fall behind on their bills.
Even if it can feel that way, it’s important to remember that a credit score isn’t a comment on your character, but rather a simple math model. It can also be a narrower way to judge your ability to repay a loan, and lots of companies are trying alternative methods in turn. That being said, your credit score remains one of the most popular measuring sticks when it comes to rates on loans, credit cards, housing opportunities, and even insurance.
Generally, credit scores range from 300 to 850, with a higher score indicating that you’re more likely to pay on time.
FICO and VantageScore are two of the largest credit-scoring agencies in the U.S., and each company has multiple credit-scoring models. When checking your credit (whether it’s you, a creditor, or a landlord), the score can vary depending on which credit-scoring model is being used and which credit report it’s based on.
However, you generally don’t need to get caught up in the specifics of how scoring models differ. For the most part, the actions you can take to increase one score will help increase all your scores.
Tips for increasing your credit score
Building an excellent credit score can take time, but there are a few things you can do in the immediate future to improve it in the meantime.
Open a credit builder loan or secured credit card
Having accounts that report your payment activity to the credit bureaus can help you build credit. But, it’s a bit of a frustrating Catch-22 because it can be difficult to qualify for a new account if you don’t already have good credit.
With either a credit builder loan or a secured credit card type of account, you’ll have to put up a refundable security deposit that will equal your loan amount or credit limit. As you pay down your loan, or use your credit card and pay the bill, your payments get reported to the bureaus to build your credit history.
offers no minimum security deposit, no annual fee nor interest, and no hard credit check to apply*.
Pay down credit card balances
The amount of available credit that you’re currently using on revolving accounts, such as credit cards and lines of credit, is one of the most important score factors. This is also known as your
, and you can determine your rate by adding up all your current balances and dividing that by your total available credit. A lower utilization rate is better for your scores.
Keep in mind that many card issuers report your balance to the bureaus when they send you your statement, which is about 3 to 4 weeks before your bill’s due date. If you max out your credit card and pay the bill in full each month, you won’t pay any interest, but you’ll still have a 100% utilization rate.
So, here’s a lesser-known hack—pay down your credit card balance before the end of your statement period. Then, the issuer could report a lower balance, your utilization rate will be lower, and your credit scores may increase.
Stay on top of your bills
Paying your bills on time isn’t just helpful for recovering from past credit mistakes, it’s also important for building and maintaining good credit in the future.
You may want to sign up for automatic payments for at least the minimum amount due on your credit cards and loans. That way, even if you slip up, you won’t wind up with a late payment fee and a ding on your credit report.
Look for and dispute errors on your credit report
Your credit reports may have errors that are dragging down your scores. Review your reports for accounts that you don’t recognize, incorrect balances,
you didn’t authorize, late payments that you know you paid on time, and anything else that doesn’t look accurate. You can then file a dispute directly with the credit bureau, which will have to investigate and either verify, correct, or delete the data.
Remember, by law, you can request a free copy of your credit reports from each bureau once every 12 months on
Check your credit before you apply for a new loan or card
In addition to tracking your scores to monitor your progress, many banks and credit card issuers will give you free access to a credit score based on one or more of your credit reports.
Before you apply for a credit card or personal loan, you may want to determine which credit score the creditor uses and check that score first. When you apply, the company may review your credit report and the resulting hard inquiry could hurt your score a little. Knowing if you have a high enough score to qualify can help you avoid an unnecessary hard inquiry. If you don’t think you’ll qualify, it may be best to continue building your credit and apply later.
Keep in mind that it’s not all about your score
While a credit score can be an important component of qualifying for a loan or credit card, and a higher score can help you get lower rates and better terms, a score is often just one of many factors that creditors consider. Depending on your circumstances, other aspects outside of your score may work in your favor, including your credit history, debt-to-income ratio, and history with the company.
In a nutshell, there are numerous hacks and tactics at your disposal that can help boost your scores both before borrowing and in the long-term. But, if you can take control of your finances, pay your bills on time, and only use a small portion of your available credit, your scores will usually reflect your money mastery.
*To be eligible to apply for the Varo Believe Card, you need to have received Incoming Deposits of $200 or more in the past 31 days to your Varo Bank Account and/or Savings Account. Incoming Deposits include any deposit into your Varo Bank Account and/or Savings Account from any source outside of Varo, Varo to Anyone transfers between Varo customers, and final dispute credits.
Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.
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