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WalletPrep worksheet · Credit

How do you build credit from nothing?

Name ____________________ Date __________

Key ideas

  1. You need an account that reports to bureaus. A score is built from your credit reports. With no reported accounts, there is nothing to score yet.
  2. A FICO score generally needs 6 months. FICO, the most-used score, generally wants one account open 6 months. Some other scoring models can score you sooner.
  3. Pay in full and you pay no interest. Sam charges $15 a month on a $300 secured card and pays in full. Six months costs $0 interest.

Vocabulary

Credit bureau
A company that collects your credit history and sells reports to lenders. The three nationwide bureaus are Equifax, Experian and TransUnion.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Secured credit card
A credit card backed by a cash deposit you make up front, usually equal to your credit limit. It is a common first card for building credit.
Credit report
A record of your credit accounts, payments, balances and some public records, kept by each of the three credit bureaus.
Authorized user
Someone a credit cardholder adds to their account so they can use the card. An authorized user generally doesn't owe the bill.
Annual fee
A yearly charge some credit cards add to your bill just for having the card, whether you use it or not.

Work it out

Sam is 23, just moved out, and has no credit history. He opens a secured card with a $300 deposit and puts only his $15 streaming bill on it.

  1. Deposit (sets the credit limit)
  2. Utilization each statement
  3. Month 1 charge
  4. Month 2 charge
  5. Month 3 charge
  6. Month 4 charge
  7. Month 5 charge
  8. Month 6 charge
  9. Charged and paid in full
  10. Interest paid

Check yourself

  1. Which of these helps you build credit from nothing?

    • A. Paying rent on time with no reporting
    • B. A secured card that reports to all three bureaus
    • C. Checking your own score every week
    • D. Keeping cash in a savings account

  2. Your secured card has a $400 limit and a $20 statement balance. What is the utilization?

    • A. 2%
    • B. 5%
    • C. 20%
    • D. 50%

  3. How long does FICO generally need an account to be open before it can produce a score?

    • A. 1 week
    • B. 1 month
    • C. 6 months
    • D. 2 years

Your turn

Call your bank or a local credit union and ask if it offers a secured card or credit-builder loan that reports to all three bureaus. Write down the fees and the minimum deposit.

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Answer key

How do you build credit from nothing?

Work it out

  1. Deposit (sets the credit limit)$300
  2. Utilization each statement5%
  3. Month 1 charge$15
  4. Month 2 charge$15
  5. Month 3 charge$15
  6. Month 4 charge$15
  7. Month 5 charge$15
  8. Month 6 charge$15
  9. Charged and paid in full= $90
  10. Interest paid$0
  1. Each statement shows $15 on a $300 limit. That is $15 ÷ $300 = 5% utilization, a low figure.
  2. Autopay clears the full statement balance each month, so Sam pays $0 in interest over six months.
  3. After 6 months he has paid $15 × 6 = $90, all on time. A FICO score can generally be calculated now.
  4. His $300 deposit stays with the issuer while the card is open. It comes back if he closes the card in good standing or the issuer upgrades it.

Check yourself

  1. B. A secured card that reports to all three bureaus Only accounts reported to the credit bureaus build a credit record. Unreported rent, savings and checking your own score don't add history.
  2. B. 5% $20 ÷ $400 = 0.05, or 5%.
  3. C. 6 months FICO generally needs at least one account open for 6 months or more. Some other models can score you sooner.