How to Build or Rebuild Your Credit Score from Scratch

Your credit score is one of the most important factors in determining your financial health. Whether you’re starting fresh or looking to rebuild your credit, understanding the process and taking the right steps is essential. A good credit score opens doors to better loan rates, lower insurance premiums, and more financial opportunities. But how do you build or rebuild your credit from scratch? In this post, we’ll walk you through the key steps to help you get started.

 

What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness—the likelihood you’ll repay debts on time. It ranges from 300 to 850, with higher scores being better. Lenders, landlords, and even some employers use your credit score to assess your financial reliability.

Credit Score Ranges:

  • Excellent: 750-850
  • Good: 700-749
  • Fair:  650-699
  • Poor: 600-649
  • Very Poor: 300-599

Your credit score is calculated using data from your credit report, which tracks your borrowing and payment history. Once a year, you can claim on free report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com. If you have no credit history or are just starting out, you may not find a report yet, but it’s still worth checking to ensure there are no errors or signs of identity theft.

If you’re in the process of rebuilding credit, reviewing your report will help you spot any issues that need to be addressed

 

What Factors Affect Your Credit Score?

Understanding how your score is calculated is key to building it. The main factors are:

  • Payment History (35%): Paying bills on time has the biggest impact. Late or missed payments can significantly lower your score.
  • Credit Utilization (30%): This is the percentage of your available credit that you’re using. Keeping it below 30% is ideal.
  • Length of Credit History (15%): The longer your credit history, the better. This includes the age of your oldest account and the average age of all accounts.
  • Credit Mix (10%): Having a mix of credit types (e.g., credit cards, auto loans, mortgages) shows lenders you can handle different kinds of debt.
  • New Credit (10%): Opening too many new accounts in a short time can lower your score. Each inquiry for new credit creates a “hard pull” on your report.
 
 

What to Avoid When Building Credit

  • Not Making Payments on Time: The most significant factor affecting your credit score is your payment history. Late or missed payments can have a major negative impact, so it’s essential to pay your bills on time. Set up reminders or enroll in automatic payments to avoid missing due dates. If you’re having trouble keeping track of payments, consider using a budgeting app to stay organized.
 
  • Keeping Your Credit Utilization High: Credit utilization is the ratio of your credit card balance to your credit limit. Aim to keep your utilization below 30%. For example, if your credit limit is $1,000, try to keep your balance under $300. High credit utilization signals to lenders that you might be relying too heavily on credit, which could lower your score.
 
  • Avoid Opening Too Many New Accounts: Opening new credit accounts can temporarily lower your score due to hard inquiries on your credit report. While it’s important to have some credit history, avoid opening multiple accounts in a short period, as this can hurt your score. Instead, focus on managing your current accounts responsibly and waiting until you’ve built a solid credit history before applying for new credit.

 

 

Whether you’re starting with no credit or rebuilding after some missteps, following these steps will set you on the right path toward a healthy credit score. The most important thing to remember is to stay consistent and stay patient. Over time, good credit habits will pay off, opening the doors to better financial opportunities.

If you’re looking for more personalized advice or tools to help you on your credit-building journey, don’t hesitate to reach out to your credit union. Many credit unions offer credit-building resources, low-interest loans, and financial counseling to help you succeed.

Start small, stay diligent, and before you know it, you’ll have a credit score that reflects your hard work and financial responsibility!

Need an extra hand to take charge of your finances? Contact us today!