Learn more about credit:
Building Credit
Building a solid credit history is important for your financial future. Although getting started may seem difficult, here are a few suggestions for establishing your credit history.
- Co-Signer: most lenders and credit card issuers will grant credit to someone who doesn’t otherwise qualify if a relative or friend with a strong credit history co-signs. Co-signing is a serious commitment because it affects the individual’s credit and creates responsibility for the debt if you fail to pay.
- Secured Credit Card: a secured credit card requires a savings account with the credit card issuer. The savings account is used to secure the credit card, so you are not allowed to withdraw the money. Your credit card limit is a percentage of the amount in your savings account, typically 50 to 100 percent. Secured credit cards usually carry a higher interest rate and an annual fee, so you will want to upgrade to an unsecured card once your credit is sufficiently established.
Getting started with one of these methods, keeping your card balance low and diligently making payments on time will demonstrate you are a responsible borrower, and pave the way for obtaining a major credit card, car loan or mortgage in the future.
Rebuilding Credit
While you can’t erase a poor credit history, you can rebuild it, but it takes time and a concentrated effort. Your credit report is a record of your history and cannot be changed unless information was reported in error. Beware of companies offering to “fix” or “erase” your credit for a fee. Any actions available to a credit repair service are available to you.
Your repair plan consists of paying off old debt and establishing new “good” credit.
- Order a credit report to get a complete picture of all debt.
- Create a budget and stick to it. Ensure your budget allows you to pay more than the minimum credit card payments.
- Make each monthly payment on time.
- Put any extra money, such as a bonus or gift, towards paying off existing debt.
- Avoid adding more debt. If necessary, cut up your credit cards to avoid temptation. However, it’s a good idea to leave at least one card open so you can use it to demonstrate your ability to handle credit. As debt is paid off, build new credit by using an existing credit card to make small purchases that you can pay in full monthly. As time goes by, your new credit history will overcome your negative history. The length of time depends on how long your negative history existed.
- If you are unable to meet your monthly payment obligations, immediately contact the lender, which is imperative if your loan is past due.
- If you need help, consider a nonprofit credit counseling organization that provides debt management counseling and money management training.
Boost Your Credit Score
A strong credit score can pave the way for financial opportunities, such as easier approval for renting a home or apartment, qualifying for a home loan, obtaining lower interest rates and insurance premium rates, and avoiding security deposits on cell phones or utilities.
Follow these tips to help boost your credit score:
- Monitor your credit report. Your credit report illustrates your credit performance, so accuracy is important. You can receive a free credit report weekly from each of the three credit reporting agencies, through the official government website at annualcreditreport.com.
- Set up automatic bill pay. Payment history makes up 35 percent of your credit score. The longer you pay your bills on time, the better your score. Avoid missed payments by setting up your credit card bills to pay automatically.
- Keep balances low on credit cards and other revolving credit. Big balances can hurt your score, regardless of whether you pay your bills in full each month. Typically, you can increase your score by limiting your balances to 30 percent or less of a card’s limit.
- Apply for new credit accounts only as needed. Too many revolving credit accounts and inquiries can reduce your score. Keep this in mind the next time a retailer offers you 10 percent off if you open an account.
- Don’t close old, paid off accounts. According to FICO, closing accounts does not help your score, and can in fact damage it by hampering your outstanding debt to available debt ratio. An exception to this is if you have a large number of revolving store accounts.
