Category: Borrowing 101

How to Build Your Credit

Build your Credit

If you’ve ever wanted a car, home or to go to college you know that a good credit score can be the key to reaching these goals. If you want to keep borrowing at a minimum, you need to have a good credit history.

Bad credit can lead to spending more money or being denied credit. For example, having to pay just one extra percentage point on an average home mortgage because of bad credit could cost $100,000 or more over the course of the loan. A bad credit score may also make it expensive or impossible to get some education loans.

Your credit score is basically a summary of your past payment history and how you have dealt with your debt in the past. It tells lenders how much of a risk you as a borrower. If you want to have better chances at reaching your financial goals like getting a house or car you need to do some basic maintenance to strengthen your credit score.

To build and maintain good credit, consider these tips:

  • Use your bank account responsibly — bounced checks could make it difficult to open other accounts in the future.
  • Make sure you pay all of your bills in full and on time. This includes all services in your name such as telephone, cable, gas or electric.
  • Consider one credit card. Having numerous credit cards will not necessarily help your credit score and may increase your risk of financial problems. If you do have more than one or two cards, consider paying the extra cards off and stop using them.
  • Always make payments for loans and credit accounts by the due date each month. Even being one day late may increase your interest rate and may result in a late fee ($35 on average). If a payment is more than 30 days late, your credit report may be negatively impacted for up to seven years.
  • Increase your credit limit. Once you have had a credit card for a few months and make your payments on time, consider increasing your credit limit. Doing so can help you improve your credit utilization ratio. This is the ratio of your balances to your credit limits. Having your balances at 30% or less can help your credit score (but the lower the better). However, make sure to keep outstanding balances to a minimum so try to pay off your debt as much as possible before requesting the increase.
  • To improve your credit score without a credit card, you can do these two things:
    • If you have loans, make sure that you make your payments on time and in full. One of the most important parts of credit is payment history.
    • Get an installment loan to help raise your credit score. If you have the need, getting a loan such as an auto, mortgage, personal, or student loan where you have a set payment every month can do this. If you don’t have a need for these types of loans, consider a credit-builder loan.
  • Contact your creditors if you have an emergency and cannot pay your bills. Before you call, have a clear summary of why you can’t pay and what you would like the creditor to do to help. For example, if you can’t afford a $100 minimum payment, maybe you can afford a $40 minimum payment.
  • Review your credit report periodically for accuracy. Knowing what’s on your credit report will give you a chance to dispute any information you feel is inaccurate.

If you’ve been denied credit based on information in your credit report, the lender is required under the Fair Credit Reporting Act to provide you with the name of the credit reporting agency. They must also tell you that you may obtain a free copy of your credit report at your request. Otherwise, you can use the AnnualCreditReport.com website to review your report.

Improving your credit score may take a while so be consistent and diligent. It may take weeks or months to see any improvement, but it is worth the work. To start, you may want to do some research online to investigate some of these tactics further. Contact a credit counseling advisor if you need guidance on starting your credit building journey.

Finally, the most important thing you can do to build or maintain your credit is to start now. If you wait until you need a good credit score you may have to delay some of your goals or pay more money than you should.

For more guidance, you can utilize online resources like Experian, the Consumer Financial Protection Bureau, and Take Charge America. Or utilize the resources available to you as a SMFCU member such as MoneyEdu or our CreditSense app.

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