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How to Build Your Credit Before You Borrow

June 15, 2018

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You’re not alone if you checked your credit and think your score could be a little higher.

Experian found that the average American has a 675 VantageScore credit score. While that’s the highest average score since 2012, it’s still in the “fair” range rather than good or excellent ranges. And 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 scores? 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 three primary consumer credit reporting companies in the United States. They are Experian, Equifax, and TransUnion. These companies collect and are sent data on hundreds of millions of consumers, and they organize all the information to create and sell credit reports.

A credit-scoring model takes the information in a credit report and spits out a number that represents the likelihood that the person will fall behind on his or her bills.

To be sure, a credit score isn’t a comment on your character, even if it can feel like it, but simply a math model. It may also be a narrow way to judge your ability to repay a loan, and lots of companies are trying alternative methods. But a credit score remains one of the most popular measuring stick.

Generally, credit scores range from 300 to 850, with a higher score indicating that you’re more likely to pay on time. (I.e., a higher score is better.)

FICO and VantageScore are two of the largest credit-scoring agencies in the U.S., and each company makes multiple credit-scoring models. When a creditor, landlord, or you check your credit, 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.

A few ways to help increase your credit score

Building an excellent credit score can take time but there are a few things you can do today and in the next few months to improve your credit scores.

  • 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 Catch-22 because it can be difficult to qualify for a new account if you don’t already have good credit. How frustrating.

    A credit builder loan or a secured credit card could be a good way to start. With either 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.

  • 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 utilization rate, 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.

    But many card issuers report your balance around when they send you your statement, which is about three to four 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 percent 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 can help you recover from credit mistakes and is important for building 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. This way, even if you slip up, you won’t wind up with a late payment fee and a negative mark on your credit report.

  • Look for and dispute errors on your credit reports. Your credit reports could have errors that are dragging down your scores. Review your reports for accounts that you don’t recognize, incorrect balances, late payments that you remember paying on time, and anything else that doesn’t look accurate. You can then file a dispute online, and the bureau has 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

You can monitor your progress by tracking your scores, and 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 find out which credit score the creditor uses and see if you can check that score. 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 try later.

Creditors care about more than your score, and so should you

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. Others may include your credit history, your monthly debt payments versus your income (i.e. your debt-to-income ratio), and your history with the company.

There are hacks and tactics that might help boost your scores. But if you can take control of your finances, always pay your bills on time, and only use a small portion of your available credit, your scores will usually reflect your money mastery.  

Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.

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Louis DeNicola

Louis DeNicola

Louis DeNicola is a freelance finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to Varo, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including Credit Karma, Wirecutter, Funding Circle, and Experian.

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