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Credit Building

How to help build credit from scratch

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If you feel frustrated that your lack of credit history prevents you from qualifying for the best loans or credit cards, you’re not alone. Nearly 59 million Americans have subprime credit scores below 660 due to limited activity. 

The good news is that you can develop strong credit quickly with some strategic moves.

By applying for a credit builder account and using it responsibly, you can demonstrate your ability to handle financial commitments over time. As you build a positive track record, your scores can gradually improve, making you a lower-risk borrower in the eyes of lenders. This can unlock better interest rates and help you establish a good credit standing. 

 If you're new to credit, this article outlines areas to consider early on in your journey.

What Is Credit and Why Does It Matter? 

Your credit scores represent your financial reliability and trustworthiness based on how you borrow and pay back debts responsibly. Key factors that shape scores calculated by FICO and VantageScore include:

  • Payment History: The most influential category is whether bills like credit cards and loans are paid on time. Even one 30-day late payment can sink scores.

  • Credit Utilization: This measures how much of your total credit limits are being used. Using less than 30% of your credit limit is recommended, but under 10% is best. 

  • Credit Age: The length of time an account is open. The longer, the better.

  • Credit Mix: Variety among types of credit — installment loans, credit cards, mortgages, etc.  

  • New Credit: Opening many new accounts rapidly will temporarily raise your risk levels.

Understanding your credit score is the first step to improving it. From there, building a strong credit history can lead to better loan rates as time goes on.

A recent study reveals that improving your credit score from fair (580 to 669) to very good (740 to 799) could save you $22,263 over the life of your credit and loans. An excellent credit score not only makes it easier to rent a good quality apartment without paying large deposits, but can also help you avoid paying security deposits on utilities and cell phone plans.

How to Help Build Your Credit From Scratch

To help build credit from no prior history, the most effective strategy is to open a secured credit card (which usually requires an initial refundable deposit) and use it to make modest monthly purchases you can pay off in full. Before each month’s due date, we recommend that you pay down your balance as low as possible a couple of days early. This helps to reduce risk of missing payment deadlines due to unforeseen circumstances. Ideally, you’d like it paid down to less than 10% of your monthly spending limit, but keeping it under 30% is also acceptable. If times are particularly tight, pay the minimum due instead. However, minimum payments often keep your credit utilization rate high, which can harm your credit score. 

Read more: Why your credit score may have dropped

You should have a positive credit history after using credit responsibly for 6-12 months, which should continue to rise with proper spending habits and additional on-time payments. Additionally, you can consider becoming an authorized user on a partner's established credit card to contribute to a better credit score, or check if your rent or utilities payments can be reported to demonstrate your financial competence further. Building credit requires diligence with key starter accounts, but essential long-term habits, such as paying on time, can compound quickly.

Secured credit cards offer the closest experience to a standard card and can equally develop long-term credit records. They usually require refundable security deposits that become spending limits for purchases. Student cards from issuers (with lenient approval criteria) are another method to consider.

Ideal Beginner Card Traits Include:

  • Low or no annual fees

  • Higher spending limits if payments are made on time

  • Payment reporting to all three credit bureaus 

  • Low credit access requirements

You can treat secured cards as you would an unsecured card, keep utilization under 30% and never miss payments. But other credit-building alternatives exist, too, like starter accounts.

Leveraging Starter Accounts to Establish Credit  

Opening your first credit card is key to fixing bad credit, but the real work begins with maximizing its ability to impact scores positively. How to make the most credit progress within 6-12 months of regular usage boils down to two essential habits:

1. Always Pay On Time

To maintain a good credit score, it's important to set up automatic payments for at least the minimum amount due each month. Even one late payment that is 30 days past due can drop a fair credit score by 17-37 points. Missing more payments may compound the damage.

It's suggested that after your credit card statement is finalized, you wait for at least 25 days before your payment is required. This gives you ample time to review your statement, plan your finances, and ensure you pay on time to avoid any late fees or negative impacts on your credit score. While payment cycles typically run monthly, it's important to check the terms of your credit agreement. Daily interest charges can accrue outside the grace period, so larger purchases may require mid-cycle payments to keep your utilization low.

2. Keep Balances Modest

Maintaining a good credit score is essential for financial stability. Let's say you have a credit limit of $500. Keeping revolving balances below $150, which is 30% of the limit, is recommended to prevent proportional score drops. However, to optimize your score potential, you should keep your balance under $50, only 10% of the limit. To achieve this, paying down your balances aggressively before the monthly statement closing dates, which determine reported utilization, is advisable. Consistently keeping your utilization rate low can help you earn increased access to credit in the future.

Note: Having a low credit utilization rate doesn’t mean you can’t spend up to your credit limit. As long as you’ve paid down your balance to 10-30% before the due date, your credit utilization could still be considered low.

Remember, building credit relies more on forming good long-term habits, building credit is not a quick fix. Even if you stumble occasionally, it's important to bounce back and show that you can manage your credit responsibly over time.

Other Best Ways to Establish Credit

It is valuable to have a well-rounded approach to building credit. While starter credit cards are useful for establishing a foundational credit history that many lenders consider, combining various methods can speed up credit score improvements by showcasing a wide range of financial competence.

Become an Authorized User on an Established Card

An effective method to help boost your credit is by becoming an authorized user on a family member's or spouse's credit card with a good history. This could allow you to benefit from their positive credit record, potentially improving your own credit profile. However, it's crucial to understand that any negative actions or late payments on that card can negatively impact both of your credit scores. Therefore, it's vital to make this decision carefully and consider the implications.

Credit-Builder Loans

Another way to boost your credit is by using credit-builder loans. With these loans, you pay a fixed amount every month. Once you've paid off the full loan amount, you receive the money. This kind of setup helps you build a good repayment history, saves money, and earns interest along the way.

Housing and Rent Payments

When you provide consent to specific rent and utility reporting services, they can include your on-time housing payments in your credit history. This can benefit credit scores that consider alternative data, such as VantageScore. However, its impact on traditional FICO scores, which prioritize debt repayment history, may be minimal. Nevertheless, this reporting can still be advantageous when lenders review your credit for loan approvals.

Rebuilding Bad Credit

If you have bad credit due to personal financial mistakes, all hope is not lost. With some strategic effort and time, you can rebuild your credit.

To improve your credit score, you should start by obtaining your credit reports. This can help you understand what is currently causing your scores to be low and how long negative marks will remain listed. Some common issues that affect credit scores include collections, bankruptcies, foreclosures, and late payments.

Smart personal finance habits are important to improve your credit score. This includes avoiding missed payments, low credit utilization, and paying down debts. When applying for credit, limit the number of credit checks to only those likely to be approved.

With consistent diligence, credit scores typically rebuild in a couple of years. Remember that bad credit does not define you forever. Stay determined, seek help if needed, and build toward a brighter financial future for yourself.

Put a Bank to Work For You  

Varo Bank recognizes the seemingly unfair obstacles that beginner credit-builders face. That’s why we’ve developed products explicitly designed to drive early meaningful score progress regardless of your financial history.   

The Varo Believe Card helps newly qualified customers build credit with responsible usage on everyday purchases1. Customers using the Believe Card increased their scores by 42 points on average within three months of on-time payments2, and perks like no security deposits or hidden fees help to alleviate stresses as you establish your financial footing.  

When it comes to building your credit score, have hope, stay determined, and let no obstacle deter you from the financial future you deserve. Now is the time— you’ve got this!

Get started today or click to learn more about the Varo Believe Credit-Builder Card!


1 The Varo Believe Secured Credit Card is designed to help you build your credit; however, a variety of factors impact your credit including payment history, utilization, derogatory marks, account age, total number of accounts, and inquiries--not all factors are equally weighted. Building your credit may take time and is a process, but the Varo Believe Card may be able to help when you consistently make on-time payments.

2 After three months of timely payments on the Believe card and no late payments on other credit, Varo Customers who had an existing VantageScore® 3.0 credit, on average, saw an increase in that score of approximately 42 points.  Individual results may vary, and some customers may not see a score increase. 

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