Jim Droske has a nearly perfect credit score of 839 from Experian using the FICO 9 scoring model. He had hit the ultimate 850 mark in early 2020, but his score has since dropped after two inquiries showed up on his credit report for a mortgage refinance.
Regardless, Droske has today what lenders consider an excellent credit score. However, he knows that he didn’t get there over night. Today, Droske’s work entails helping people build credit as president of Illinois Credit Services, a credit counseling company.
Curious what he would advise to those who are just starting out with no money or have bad credit, CNBC Select asked Droske what he would do if he had to start fresh from scratch. “There are a lot of do’s and don’ts,” he says.
Below, we share three moves the credit repair expert said he would make.
1. He would find any source of income
“First, you must be earning some amount of income so you can stay afloat,” Droske says. “You cannot get anywhere without some sort of income.”
While this may seem obvious, the idea is that you should prioritize making money if you have none. Only then will you have the ability to pay your bills, which helps you build credit. Remember that your payment history is the most important factor that determines your credit score.
The current economic climate makes it more difficult than usual to find a stable job, but consider supplementing your income in other ways while we wait for things to recover.
Here are some ideas:
Use a cash-back credit card for all your spending
For any essential purchases you do make (e.g. groceries), use a credit card that gives you cash back. The Capital One® QuicksilverOne® Cash Rewards Credit Card allows those with average credit to qualify and cardholders earn 1.5% cash back on all their purchases.
2. He would pull his credit report
If you have bad credit, figure out what is holding you back, says Droske.
“Run your credit report and see what’s on there. Sometimes, people don’t want to look because they know it’s not going to be what they want to see — but you have to.”
Your credit report is a good overall picture of where your credit health stands. On it, you will find a variety of information about your accounts, inquiries and public records. Past-due accounts (late payments) that you see stay on your credit report for up to seven years. Late payments also negatively impact your credit score for as long as they remain on your report, but their impact lessens over time.
Pull your credit report weekly for free at AnnualCreditReport.com. Check to make sure the information is accurate. About a quarter of Americans have an error on their credit reports, which can lower your credit score and impact your chances of qualifying for new credit.
3. He would build (or rebuild) credit ASAP
Having good credit is important if you ever want to rent an apartment, buy a home, get an auto loan or open a business. A healthy credit score helps you qualify for loans and credit cards, and higher scores earn you lower interest rates.
The earlier you start building a credit profile the better: Credit scores take into account your length of credit history, or how long you’ve had credit in your name.
“You need to show you are managing credit responsibly in order to have good credit so start rebuilding ASAP,” Droske says.
It’s admittedly tougher to improve your credit score when you have no money. The trick is to get into good habits while working with the resources you’ve got. Protect your score by paying your monthly bills on time and avoid charging more than you can afford. If you have a balance on your credit card, try to pay as much off as you can afford (ideally the whole balance). That way you save on interest and keep your credit utilization rate low. Credit card debt is the most expensive because of its high interest rates.
“Do not use credit cards like a loan,” Droske says. “Use them as a convenient way to pay for things. Only charge about 5% to 10% of your credit limit and pay it off in full each month to avoid paying interest.”
For those just starting out with no credit whatsoever, get started with a secured credit card (made for beginners), or see if a family member can add you as an authorized user to one of their credit cards. This way, you can piggyback off their good credit behaviors and see your own score go up.
Have no credit? Start building credit with this card
The Discover it® Secured is made for those new to credit or looking to build theirs back up. The card has no annual fee, a rewarding cash-back program and a generous welcome bonus. Discover will make a dollar-for-dollar match of all the cash back you earned in your first year of being a cardholder.
If you have no money or bad credit, don’t be discouraged. Everyone starts from scratch at some point. Begin by finding a stream of income, then working your way up. Make sure all your bills are paid on time and protect your score by paying down as much of your revolving balances as you can afford to every month.
“Bad credit is not a life sentence,” Droske says. “Scores can recover. The process is: Lessen the bad stuff, build the right good credit, be educated to understand how credit works and time. Time heals, too.”
For rates and fees of the Discover it® Secured, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.