Having a good credit history is essential to functioning in modern society. Your credit score is used to determine interest rates, approve rentals, establish insurance premiums and even in applying for jobs. However, according to a new study, it looks like this generation of Millennials is struggling to understand the very basics of consumer credit. It’s clear that having a good credit score is important — but how do you build or rebuild credit?
Tips on How to Build Credit
Establishing a credit history can be difficult, especially if you’re young and just starting to build credit. To obtain a credit score, you need to have at least one account that has been open for six months or longer, and at least one creditor reporting on your activity in the past six months. But how can you build a credit history if no one will give you credit?
One of the simplest ways to build credit is by getting a credit card. This can include anything from a major credit card to a store or gas station card, which you can use for any number of purchases. The key with using credit cards to build credit is using them wisely. Don’t go over your credit limit or allow your balance to get so high that you cannot afford payments. Every month, pay on time, and pay at least the minimum amount due. This will help to build a strong credit history.
If you do not qualify for a credit card, there are other options for building credit. This includes obtaining a secured credit card, a co-signed credit card, or authorized user status on another person’s card. A secured credit card is backed by a cash deposit; you submit money to the card company, and a credit limit is typically the same as the deposit amount. The card can be used like any other card; you receive a monthly bill and will incur interest if the balance is not paid in full. If you don’t make your payments, the cash deposit acts as collateral. Once you close the account, the deposit will be returned. These cards aren’t meant to be used forever; instead, you should use them until you can qualify for a traditional, unsecured card. Alternatively, you could ask a friend or family member to co-sign a credit card application or make you an authorized user on their existing account. For co-signed cards, the co-signer’s credit history can be used as a basis to obtain a credit card. Importantly, the co-signer is legally responsible for your debts if you do not pay. If someone adds you as an authorized user on their account, you may be able to build credit history for payments made. Be sure to check with the credit card company to ensure that authorized user history is reported to credit agencies.
Another option for building credit is to apply for a credit-builder loan. Credit unions or local banks often offer these loans; they act as a sort of savings program. You borrow money, and the bank holds the money until you have paid the full amount. Because these payments are reported to credit bureaus, it is a way to build credit while saving money.
How You Can Improve Your Credit
Once you have established credit, it is critical to maintain good credit so that you are able to obtain loans, get good interest rates and more. Your credit score is determined by a formula that takes a number of factors into account, including your payment history, number and age of accounts and your debt to credit ratio. You can improve your credit score by taking these five simple steps.
First, make all of your payments on time. This isn’t limited to credit cards, but to all accounts, including utility and medical bills. If you do not pay your bills, they may be sold to a collection agency; this will seriously damage your credit. If you miss a payment, make sure to pay as soon as possible; the impact on your credit score depends on just how late the payment is.
Second, keep your credit card debt low. The important thing to keep in mind here is the ratio of your credit card debt to your credit card limits. Carrying a balance may be unavoidable, but try to keep your balance below 30% of your limits. When possible, pay extra each month to chip away at your balances.
Third, as long as your accounts do not have an annual fee, keep them open for as long as possible. This helps to establish a length of payment history and credit utilization, both of which are important factors in your credit score.
Fourth, don’t open too many new accounts at once. When calculating your credit score, the average age of your accounts is taken into account. Opening too many new accounts in a short period of time lowers your average account age, which can negatively impact your credit score.
Fifth, check your credit report regularly. Report any errors to the credit bureau, and watch for any suspicious activity. You may want to subscribe to a credit monitoring service to ensure that your credit history is safe.
By doing each of these things, you can help to improve your credit score. Conversely, if you make late payments, have a high credit card balance, close accounts quickly, open lots of new accounts at once and fail to check your credit report, you can seriously hurt your credit score. Because credit is so important in so many areas of life, be sure that your actions are raising your credit score — not lowering it!
How to Rebuild Credit
If you have a bad credit score, it may feel like an impossible task to improve it as you struggle with debt and an inability to get new forms of credit. The good news is that there are a number of different ways that you can rebuild your credit and improve your score.
First, face the problem head-on. You cannot begin to rebuild credit by ignoring your problems. Get a copy of your credit report, and gather your bills. Then you can start to make a plan to improve your credit.
Second, look at your credit utilization ratio. A high debt to credit ratio will have a negative impact on your credit. Figure out the credit utilization ratio for each of your credit cards, and pay off the cards with the highest rates first.
Third, avoid missed payments. As mentioned above, late payments can have a tremendous impact on your credit score. Do everything you can to make payments on time, even if the payments are the minimum amount. Set up automatic payments or use reminders to make sure that you are making your payments on time. If you’re struggling to make the minimum payments, talk to your lender about repayment options and late payment forgiveness.
Fourth, apply for a secured credit card. If your credit mistakes have barred you from getting a traditional credit card, start to rebuild your credit history with a secured credit card (described above). By making regular payments on time, you can rebuild your credit history. Before choosing your credit card company, make sure that the company reports to each of the major credit bureaus.
Fifth, establish different types of credit. Once you have improved your credit score, continue to rebuild it with other forms of credit. Apply for a school or car loan, if needed, or switch from a secured to an unsecured credit card. This will likely have a positive effective on your credit, as it will demonstrate that you are able to manage different types of credit.
As with building credit, rebuilding credit takes time and dedication. It may take as long as seven years to see improvements in your score. But by following these steps and making smart choices, a good credit score is well within reach.