I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.
See all posts Frank GogolWhat is Credit and How is it Built?
Updated on March 12, 2024
Written by
Written by
Reviewed by
Rohit Mittal
Reviewed by
Rohit Mittal
Rohit Mittal is the co-founder and CEO of Stilt. Rohit has extensive experience in credit risk analytics and data science. He spent years building credit risk and fraud models for top U.S. banks. In his current role, he defines the overall business strategy, leads debt and capital fundraising efforts, leads product development, and leads other customer-related aspects for the company. Stilt is backed by Y Combinator and has raised a total of $275M in debt and equity funding to date.
See all posts Rohit MittalIt’s no secret having a good credit score has many advantages. You get better deals on
If you are new to the credit game, you can take a look below to understand exactly what credit is. Or suppose you don’t have a good credit score at the moment. In that case, it is vital to know how you can build your credit to reap the long term benefits. Let’s take a look!
What is a Credit Score?
Your credit score is a number, usually between 300 and 850, allocated to you by a credit bureau or credit agency. Your credit score and credit report shows lenders how well you manage your financial responsibilities over a period of time. Lenders also use this score to predict how likely you are to repay money borrowed from them.
Your credit score is based on the information on your credit report. Your credit report, in turn, contains the information reported to credit bureaus from financial institutions such as your existing lenders.
The ultimate purpose of your credit score is to be a reliable, objective way for lenders to assess your creditworthiness.
How are Credit Scores Determined?
Having a good credit score is essential. So how exactly are credit scores determined?
Each credit reporting agency has its own way of calculating your credit score. So your credit score won’t always be precisely the same with each credit agency or credit bureau.
However, the two most commonly used type of credit scores is FICO and VantageScore. You can see exactly how FICO calculates its credit scores here. This page will also show you how VantageScore calculates its credit scores.
Overall, your credit score is calculated using the following information as it appears on your credit report (these are called credit factors):
- Your payment history
- The types of credit you use
- Your credit utilization ratio
- How long you have been using credit
- Any public records, for example, a bankruptcy
- The total balance of all your debts owed
- The number and recency of credit accounts you’ve applied for.
How to Check Your Credit Report
It is essential to regularly check your credit report. Firstly, it is important to know what your credit score is and see whether there is room for improvement. If you want to apply for credit, you also want to understand what your potential lender will be looking at.
But most importantly, it isn’t uncommon for credit reports to contain mistakes. If your credit report has an error, it could unnecessarily negatively influence your credit score. So it is always a good idea to regularly review your credit report and make sure there aren’t any mistakes that need to be corrected. If you find an error, contact the agency immediately and have it fixed.
To check your credit report or see what your credit score is, you can get one free credit report from each of the leading credit bureaus each year. You can contact Experian, TransUnion, and Equifax and request your credit report from them.
Two Ways to Build Your Credit Score
If you don’t have any credit or you want to build your credit score, there are a few ways you can go about it. The two easiest ways are getting a secured credit card or getting a credit builder loan.
Let’s take a look at each in some more detail.
With a Secured Credit Card
A secured credit card is a safe option lenders are willing to offer borrowers who have a low or negative credit score.
A secured credit card is backed by a cash deposit. You pay a deposit that is equal to your credit limit upfront. The lender has no risk in providing you with the credit card as, should you default, your deposit is security for the outstanding balance. The amount you can deposit varies from lender to lender. However, the usual amount you can deposit and use on your secured credit card is $200.
Once your secured credit card is activated, you will use your card exactly like you would use any other credit card. You can make purchases, and interest will accrue on any outstanding balances. Each time you make a timely payment towards your outstanding balance, it will positively impact your credit score.
Your secured credit card isn’t meant to be used forever. The purpose of the secured credit card is to build your credit score to a point where you qualify for an unsecured credit card. Once you’ve sufficiently built your credit score, you can close your secured credit card account, and you will receive your deposit back.
When you choose an unsecured credit card, make sure you choose one with low annual fees. It is also essential to ensure your payment data will actually be reported to all three credit bureaus. Your credit score is built by the information reported to the credit bureaus. Choosing a card that reports your information to all three credit bureaus ensures you build a more comprehensive credit history.
With a Credit Builder Loan
Another option to build your credit score is to get a credit-builder loan (also known as a secured loan). As the name suggests, the sole purpose of a credit builder loan is to help people like you build their credit scores.
A credit builder loan works almost like a savings program. The money you “borrow” is held by the lender until you have repaid the whole amount upfront. The lender doesn’t have any risk as they receive their money before giving you the lump sum.
The most important aspect of a credit builder loan is that all your on-time payments are reported to the credit bureaus. This is what builds your credit score. Some credit builder
As with a secured credit card, you should also make sure your payment information is reported to all three credit bureaus.
Once you’ve made all your payments towards your credit builder loan, you get the loan amount refunded back to you.
Conclusion
Hopefully, you now have a better idea of what is credit and how is it built. If you’re struggling with a low credit score, get a secured credit card or credit-builder loan and start building your credit score. You will undoubtedly reap the benefits and get long term rewards!
Frank Gogol
I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.