Building your credit, one brick at a time
The sooner you start establishing credit, the easier it is to do everything from buying a cell phone to leasing an apartment — not to mention what it does for your insurance rates! And of course, healthy, positive credit is vital to your ability to purchase a home or car or even get a job, since many employers consider your credit when offering you a new position. Bottom line: A great credit score is something you’ll want to build early and protect always. (If you’re not sure where to find your credit score, check out this free resource.)
How do you go about establishing credit, you ask? Good credit is essentially a good fiscal reputation — you just have to prove that you can be responsible with money, goods, or privileges provided, doing as promised in the required amount of time. We’ve put together some ways you can begin establishing credit now; while many of them are geared toward younger people, these practices are helpful to anyone who’s building — or rebuilding — their credit.
Become a signer on a parent’s card. For a younger person, asking a parent to add you to their credit card account as an authorized user is an excellent first step. If they have excellent credit history and keep their balances low, you’ll be associated with their responsible spending habits. Just make sure the card issuer reports authorized-user activity to the credit bureaus, as not all do.
Pay your student loans on time. If you took out student loans to pay for college, your lender(s) will usually report your accounts and payments to the credit bureaus. Even if you defer making payments until after you leave school, student loans can help you establish credit — as long as you make your payments on time every month once you do start paying them back.
Pay all bills in full and on time. Utilities and cell phones sometimes report payment histories (especially if you’re late paying). So, paying on time is important for all your bills. Relatedly, you can also use regular bills to build your credit! While paying your phone and utility bills doesn’t usually impact your credit score unless there’s a negative issue, you can request that those prompt payments you’re making be reported, thus boosting your score.
Look into secured credit cards. Secured credit cards are guaranteed through a cash deposit, and some are geared specifically toward students. For example, $500 would secure a card with a $500 limit. You’ll want to pay off what you’ve spent every month as healthy spending practice, which will then reflect on your credit report. When you’re ready to close the account, simply pay off the remaining balance, and your deposit will be returned. Some card issuers will transition you to a regular unsecured credit card once you've shown responsible use of your secured card.
Consider a co-signer. For lending needs beyond the student loan, a co-signer can usually help. Using a co-signer with excellent credit will increase your chances of receiving the loan. Remember, co-signers need to be aware they’re liable for the entire balance just as if they took the loan themselves. In fact, some banks even offer credit builder loans.
Open a store credit card. Do you frequently shop at stores that offer store credit cards? Though they often charge higher interest rates, using a store card and paying it off each month can help you establish your credit while raising your existing score. Or, don’t use the card at all. Simply having an open line of credit that is in good standing will help you build credit.
Increasing your credit score
Increasing your credit score may take some time, but with healthy habits and an understanding of how credit works, you’ll be well on your way! The trick is uncovering and sweeping up any past mistakes while working to strengthen future credit relationships. Here are some suggestions to help:
Request a “hard inquiry” (or “hard pull”) of your credit report. This is a free option from one of the three main credit bureaus; you can do it once a year, and you should. Check the report for any discrepancies and bills that may have gone to collections (this is also a good time to scan for any potential fraud).
Pay off your bills in collections. Not only is that bill negatively affecting your credit, the longer it remains on your report, the longer it will take to improve your credit. You’ll want to pay them off as soon as possible.
Pay your balances down. If you’ve maxed out your credit card(s), pay off at least 50% of the balance. If you’re unable to pay off enough of the balance, call your credit card company and ask to increase your limit to bring your balance to 50% of the new limit. Stop spending on the card at this point and work to pay the balance down.
Keep them down. Keeping your balance at 30%-50% of the available credit will your increase your score. Don’t take on more credit accounts (credit cards, car loans, mortgages, etc.). Pay off as much debt as you can! This might take some reworking of your budget, but will pay off in the long run.
Stay on schedule. Pay all your bills on time! Set up auto-pay if necessary, and account for mail time if you use the mail-in method, as well as processing time for BillPay. If, for any reason, you are unable to pay on time, contact your credit card company and ask to make arrangements — you don’t want it reported as a late payment.
Congratulations on your efforts to improve your credit. For more information on credit scores and their impact on your financial wellness, contact our Financial Literacy Manager.
Want more expert advice and helpful info on credit cards? Click here.
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