How to Build Credit: Responsible Credit Tips

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Do you want to be able to buy a house with a mortgage, borrow money for your dream car, or take out a loan to start a business? If so, having good credit can help turn your dreams into reality.

Your credit score, which represents the quality of your credit, is an important measure of your overall financial health. It also helps lenders determine if you can borrow money and, if so, on what terms. While a good credit rating can open the door to loans at the best rates and terms, the reverse is also true. A bad credit rating can make it impossible to borrow money, at least not without having to pay exorbitant interest rates and high fees to do so.

With that in mind, it makes sense to build credit now and throughout your life – potentially even before you are in a position where you really need it. By building credit and increasing your credit score, you can ensure you have the credit you need for any financial situation you find yourself in. Let’s take a look at some of the best ways to build credit so you can open the doors to new financial options.

Credit starts with your credit report, which is a list of all your current and past credit accounts, including credit cards, car loans, mortgages – basically any money you’ve borrowed from someone. , and whether you repaid it on time or not. The three major credit bureaus – Experian, Equifax and TransUnion – maintain these credit reports based on information provided to them by banks, credit card companies and other lenders.

But a credit report itself is just a list of accounts and information, so lenders and their partners have developed algorithms to turn that list into a specific score. This is where a credit rating comes from.

There are several types of credit scores, but we will focus on the FICO scoring method for the purposes of this guide, as FICO scores are the most commonly used credit scores used by the majority of lenders. The FICO credit score algorithm was originally developed by Fair, Isaac and Company, hence its name (FICO).

When it comes to FICO credit scores, each score is made up of three numbers that usually range between 300 and 850, with higher scores being better overall. The FICO scoring method considers the following factors when determining your credit score:

  • Payment history (35%): how often you pay your bills on time and if you have had late payments in the past.
  • Amounts due (30%): How much debt you owe relative to your credit limits.
  • Length of your credit history (15%): The average duration of opening of your credit accounts.
  • New credit (10%): how many times you have applied for a new credit account in the last two years (this is called a “thorough investigation”).
  • Composition of credit (10%): The types of credit you have, including revolving credit, installment credit, etc.

With a FICO credit score, your credit quality is determined based on these ranges:

  • Excellent: 800 and above
  • Very good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 or less

Your FICO score doesn’t have to be perfect to qualify for loans with the best rates and terms, but a higher score will make it easier for you to qualify for any loan, including a mortgage.

As you learn to build credit, you will first want to know where you stand. With that in mind, you should take the time to check your credit score early in the process. Luckily, figuring out how to check your credit score is a piece of cake, as there are plenty of ways to get a free snapshot of your credit score.

Once you know what your credit looks like, you’ll have a better idea of ​​how much work you have to do. Your next best steps for improving your credit could include any (or all) of these options.

One of the best ways to build credit is with a secured loan or secured credit card. In either case, you deposit money as collateral to secure your loan or line of credit, and you can then boost your credit score with regular, on-time monthly payments for the amounts you borrow.

Take into account Discover it® Secure credit card as an example of how this strategy might work. This secured credit card, which has no annual fee, requires a cash deposit of at least $200 to get started, which would qualify you for a credit limit of $200.

When you use the card and make one-time monthly payments to cover the items you purchase with it, Discover reports your activity to all three credit bureaus. Over time, you can build credit through one-time payments with this method. And the Discover it Secure refund your security deposit when you close or upgrade your credit card account in good standing.

Another option for building credit quickly is to apply for a credit builder loan. With this type of loan, you agree to pay a fixed amount each month for a loan, which strengthens your credit and increases your savings at the same time. In the end, you’ll get the money back, minus the fees and interest you pay along the way.

The good news is that credit builder loans are very easy to use, but they cost money. For example, Self, a fintech company, says a credit loan that costs $25 a month for 24 months will get you back $520 and pay a total of $89 in interest and fees. Throughout the process, Self reports your loan history to the credit bureaus, helping you establish credit with every payment you make.

There are several programs and apps that allow you to use everyday bills to boost your credit score. The most popular of these is Experian Boost.

With this program from Experian, one of the top three credit bureaus, you can add bills like your phone, utilities, and popular streaming services to your Experian credit report to improve your credit score. The good news is that Experian Boost is absolutely free to use, and you’ll also be able to view and monitor your Experian FICO credit score for free when you use it.

Another way to get a head start in construction credit is to get approved for a loan with the help of a co-signer. This co-signer can be a family member or partner, but either way, their better credit can help you qualify for installment loans that you can use to build your own credit history.

With a co-signed loan, you have the flexibility to make one-time payments that help boost your credit score over time. However, you should only apply for credit from someone you absolutely trust, as their late payment or irresponsible use of the loan can hurt your credit as easily as help.

Finally, becoming an authorized user on someone else’s credit card is the closest thing to a co-signed credit card. By having a family member or partner add you as an authorized user on their account, your credit can benefit from their on-time monthly payments and responsible use of credit.

Remember that the primary account holder is ultimately responsible for refunding all purchases you make as an authorized user. And like a co-signed loan, late payments and large balances accumulated by the primary account holder can potentially negatively impact your credit, so make sure you’re an authorized user for someone you trust. and who also trusts you.

Ask any financial adviser and they’ll tell you that a good credit rating is worth its weight in gold. Fortunately, good credit isn’t just for the wealthy or the well-connected. There are many tools, services and ways your friends and family can help you.

But ultimately, building credit takes time, no matter how you do it. So, by taking smart action early and being intentional about how you use credit cards and loans today, you can enjoy the spoils of your good credit score for years or decades to come.

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Kayleen C. Rice