Whether you’re buying a car or a house your personal credit score impacts every aspect of your financial life. Even if you don’t have a credit score yet or a “strong” one, building good credit is possible. Here is a guide to credit building 101:
First thing’s first, what is a credit score?
Simply put, your credit score is a number that serves as a predictor of how likely you are to pay back a loan on time. Credit bureaus calculate your credit score by considering information such as payment history, current unpaid debt, how much available credit you’re using, bankruptcies, and foreclosures. Scores typically range from 300 – 850. Higher scores indicate a greater likelihood that you will make a repayment. It also shows that you are less of a risk to a lender, so the higher your score, the better. Any score of 670 or higher will make you more likely to be approved for a loan, get better interest rates which save you money over time, and qualify you for more financing promotions.
How can I establish or improve my credit?
- Open a secured card. This is probably the easiest and most efficient way to establish credit. There are many cards to choose from. So, do your research and see which one is a good fit for you. If you haven’t accessed credit before, you can start with a secured card. With secured cards you put down a deposit to start using the card.
- Strategize your spending. Use your credit card responsibly. Only make purchases with your card that you can afford to pay back. For some, a good strategy is to only use credit for one type of purchase – utilities, gas, or a cell phone for example. Then you can better manage your spending each month. You never want to max out your credit spending. In fact, if you keep your use of credit below 30% of your credit limit, it will help your score. The lower the balance, the better.
- Pay on time. Once you have a card, you need to establish your reputation as a responsible borrower. Do this by paying the bill on time, and in full, every month. In the event you cannot pay in full, pay the minimum payment and stop using the card until your debt is paid in full. If you are carrying a high balance on a card already, speak with the card company about a payment plan, and focus on getting the balance paid down. Paying off balances also boosts your credit score.
- Use monthly bills. You don’t have to open a credit card to establish or improve your credit. Paying monthly bills, like rent, utilities, and streaming services on time can establish a credit history or boost your current score when added to your credit report. Consider credit building tools, like Experian Boost that report your recurring on-time bill payments and help boost your score over time.
- Don’t let just anyone “run” your credit. When applying for a credit card, trying to buy a car, or securing a rental agreement, it will be necessary for the company to run a credit check. Be selective about how often this happens. Too many credit checks can negatively impact your score.
- Dispute incorrect information. When a lender runs your credit report, you should receive a copy to review. Take a look at the report, and verify that all information is correct. If something looks off, such as a credit card you don’t own, call the credit reporting bureau that provided the report to learn more, and get the information corrected.
Take charge of your credit score with “Credit Building 101” by knowing your status and making smart spending decisions. Use payment plans to establish or improve your credit history if needed. If your score is high, keep up the good work! Good credit is crucial for financial stability and can help you secure capital for a small business. A solid credit score opens many doors, increases opportunities, and determines your access to affordable financial services that can improve your daily life. “Credit Building 101” is your guide to mastering these essential steps.
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If you’d like to learn more check out our last blog on “Understand What the Due Dates Mean on Your Credit Card” here!
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