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How Do Credit Scores Work?

You know your credit score is important - but do you know where it comes from?
Well, knowledge is power. Understanding what your score is based on puts you in a stronger position to build credit and boost that score.
Where Do Credit Scores Come from?
Your credit score is based on your history of borrowing and paying back money. This information is reported by lenders to various credit bureaus, which use algorithms adjusted for different industries. A mortgage lender might see a different score than an insurance agent, for example, but your scores will usually be in the same range.
What Is My Credit Score Based on?
Your credit score is based on a number of factors, including how much debt you have, what type of debt, how long your credit history is, how much of your available credit you use, how often you apply for new loans or credit cards, and most importantly, whether you make your payments on time, every time.

Here’s how it breaks downin percentages:

35%

Timely payments

The single most important factor in determining your score is whether you make your payments on time. If you’re more than 30 days late making a loan or credit card payment or if a bill you owe goes into collections, your credit score could drop by 100 points or more. Late or missing payments can stay on your credit report for as long as ten years.


Build helps you establish a history of consistent payments with a low monthly commitment. Even better, you’ll get the majority of your payments back, meaning you’re improving your credit and creating savings.

15%

Length of credit history

The longer you’ve been making regular payments on your cards and loans, the higher your score will be. It’s often smart to keep older credit card accounts open, even if you’re not using them anymore.


If you don’t have a credit history at all, don’t wait to get started. Build is a great, affordable way to start creating your credit history—and you’ll save money while doing it!

30%

Debt & credit utilization

This is the overall amount of debt you carry as well as your “credit utilization rate,” which is the amount you owe relative to the amount of credit you have. For example, if your credit card has a limit of $1000 and you’ve charged $500, you’re at a 50% credit utilization rate. It’s smart to pay as much of your debt down as possible and keep your credit utilization rate under 30%.

10%

Credit mix

Lenders like to see a mix of “revolving credit” (credit cards) with “installment loans” (set loans with monthly payments, like car loans, student loans, or Build Credit Builder loans!).

10%

New credit inquiries

Every time you apply for a new loan or a new credit card, you get what’s called a “hard inquiry” on your credit report. Each hard inquiry lowers your score by about five points and stays on your report for two years, so keep applications for new credit to a minimum.


We don’t think you should have to lower your score in order to improve it. Build does not make a hard inquiry on your credit report, so you risk nothing by opening an account with us.

Why Is a Credit Score Important?

The higher your score, the more likely you are to qualify for credit, whether that’s a new credit card, an installment plan for a household appliance, or a mortgage on a new home. A high score also helps you get better interest rates. When it comes to a big loan like a mortgage, a high credit score can save you tens of thousands of dollars over the term of the loan.


On the other hand, a low score indicates that you’ve had trouble with credit in the past and may have problems repaying the money you’d like to borrow now. That can make it difficult to get approved for credit at all, let alone get the best rates. It also makes you vulnerable to predatory lenders, such as pay-day loans, who are happy to lend you money when you’re desperate but will charge you insane amounts of interest.


No score indicates that you have no history of using credit at all. This makes it difficult for lenders to decide whether you’re a good risk or a bad one. (Spoiler alert: they’ll usually decide you’re a bad risk.)


Even if you’re not planning on taking out a loan or getting a new credit card, a low score can still hurt you. You may pay more for insurance, have a harder time finding a landlord willing to rent to you, or need to pay a deposit when setting up utility accounts.


A low credit score can make it difficult to access the credit you need to build a better life, but if a low score is holding you back, don’t worry—we can help.

How Our Credit Builder Loan Can Help

Remember that 35%? One of the best ways to build credit is to make your payments on time, every time.


When you use the Build credit builder, you take out a $520 loan—but you don’t spend it. We simply set it aside for you in a special account. Every month, you make a $25 payment, which is reported to the credit bureaus, helping to build your credit.


After 24 months, you’ve paid back your loan, boosted your score, and—bonus—you walk away with $520 in cash, a nice little nest egg that you can set aside for emergencies (no more predatory pay-day loans!).


The exact number of points you gain by using Build will vary from person to person. People with no credit may see a bigger boost than people with low credit, for example. Typically, we see scores rise by as much as 60 points just by making a few of these low monthly payments. It’s important to continue to make these payments for the entire term of the loan, however, so that you don’t risk losing your progress.

How to Build Credit for a Better Future
Build serves as a kind of on-ramp to the world of credit—a world where you can qualify for the credit you need to build a better life at the best possible terms.