Has your credit score taken a tumble due to financial hardship? If you’re in a better financial position and would like to start building it back up, the good news is you can take actionable steps you can take to reach your goal. The same applies to credit newbies looking to establish a solid credit history to achieve an excellent or good credit score.
In this guide, you’ll discover the best ways to build your credit score, whether you’ve been using credit for some time or are starting from scratch. You’ll also learn more about the significance of good credit and how to leverage it to attain financial freedom.
Understanding the Importance of Good Credit
Good credit stands as a testament to your financial reliability, showcasing a history of responsible credit usage and timely repayments. It’s a key factor that lenders and financial institutions consider when evaluating your application for loans, credit cards or mortgages. Your credit rating also plays a major role in your approval odds and how much you’ll pay for credit (or what borrowing costs to expect).
How to Check Your Credit Report
You’re entitled to one free weekly copy of your credit report from each of the major credit bureaus: Experian, TransUnion, and Equifax. To keep a close watch on your credit health, regularly review your credit reports for accuracy and signs of fraudulent activity. Discrepancies or unusual activity should be addressed swiftly with the applicable credit reporting agencies to maintain a clean credit history and to give yourself the best chance at a solid credit score.
Assessing Your Credit Score
Your credit score is determined by several factors, including your credit card balance, your history of on-time payments, the diversity of your bank accounts and your use of credit extended by credit unions and other lenders. Aiming for a score above 670 on the FICO scale puts you in good standing, as it generally indicates less risk to lenders.
Why Good Credit Matters
Good credit is vital when you want to unlock the best financial opportunities, like lower interest rates on debt products and better terms on loans and mortgages. Your credit health can influence the outcome of your loan applications and can even impact your job prospects in industries that perform credit checks as part of the hiring process. It can also affect auto insurance premiums if you live in a state that permits the use of credit-based insurance scores.
Ultimately, building and maintaining a solid credit foundation is an ongoing process that facilitates achieving your long-term financial goals.
The Basics of Credit Building
Building a solid foundation involves strategies and actions that lead to the establishment of a strong credit history.
Key Factors That Impact Your Credit
Payment History and credit utilization are the most significant components of your profile, accounting for 35 percent and 30 percent of your FICO score, respectively.
Consistently making minimum payments on time is crucial as it accounts for a significant part of your credit score. Late payments can negatively impact your credit.
Regarding credit utilization, aim to use less than 30 percent of your available credit. High utilization can signal to creditors that you’re overly reliant on credit, which can affect your score negatively. It can also make them more reluctant to extend credit to you.
What Is Credit Building?
Credit building is the process of improving your credit score to enhance your credibility with lenders. It demonstrates that you can manage loans and credit responsibly. A solid credit history can help you to obtain better interest rates and terms when borrowing money.
How Does Credit Building Work?
You can start building your credit by using a credit builder loan, which is designed to help people with no credit or bad credit. Unlike traditional loans, you make payments before receiving the loan amount, with your on-time payments being reported to the credit bureaus.
As mentioned above, a secured credit card is another effective tool for building credit. This type of card typically requires a security deposit, which acts as your credit limit. By using a secured card responsibly, you’re able to build credit as your payment and utilization habits are reported to the credit bureaus.
5 Ways to Build Your Credit Score
Here are some tips to help improve your credit score or build credit from scratch.
1. Get a Secured Credit Card
A secured credit card could be a good option if you’re building credit from scratch. You’ll need to make a cash deposit equivalent to the credit limit you’re approved for to open an account.
Once the card is active, you can use it like you’d use a traditional credit card. With responsible use and timely payments over time, the credit card issuer may upgrade you to an unsecured card and return your deposit.
2. Make On-Time Payments
Building a positive credit history is challenging if you don’t pay your lenders and creditors on time. Payment history accounts for 35 percent of your FICO score, which is the most widely used scoring model.
Once an account reaches 30 days past due, the lender or creditor can report it to the credit bureaus. A single late payment could tank your score by up to 100 points. Late payments linger on your credit report for up to seven years, but the impact will lessen over time.
So, paying your bills on time is important to give yourself the best chance of getting good or excellent credit. If you have past due accounts that aren’t yet reporting as late, contact the creditor or lender promptly and request a payment arrangement to avoid damage to your credit score.
3. Pay Off Outstanding Debts
Are there collection accounts or charged-off accounts sitting on your credit report? They could mean bad news for your score, particularly if they’re relatively new.
If you actually owe the debt, it’s a good idea to reach out to your credit card companies or lenders and request a payment plan with monthly payments you can afford. You can also offer a fair settlement payable in a lump sum. Paying off a delinquent debt may not do much for your credit score, and it won’t automatically fall off of your report, but you could get a slight boost.
4. Limit Requests for New Credit and Keep Credit Utilization to 30% or less
Each time you apply for new credit, a hard inquiry is generated and could ding your score by a few points. The impact is generally temporary, but several inquiries in a short span could hurt your credit score. So, you want to limit requests for new credit by only applying on an as-needed basis.
It’s also important to keep your balances on credit cards at or below 30 percent of your credit limit. This is referred to as your credit utilization and accounts for 30 percent of your credit score. If you can get your credit utilization ratio to 10 percent or lower, your credit score could improve even more. Or you can request a credit limit increase to lower your credit utilization without paying down the balance.
5. Fix Your Credit Report
One option you might also want to consider when working to improve your credit score is removing mistakes or inaccuracies from your credit report. There are companies that offer services to help identify and address errors on your credit report, which could be negatively affecting your score, and challenge inaccurate information with credit bureaus. Since this pathway doesn’t necessarily yield a quick fix. While a service like this can assist you in resolving discrepancies and offer advice, maintaining good financial habits is up to you. Keep your credit card balances low, pay your bills on time, and continually monitor your credit score to build and maintain a strong credit profile. That is why some of these companies also provide guidance on credit improvement strategies to their clients.
In choosing one of these companies to help you build your credit, consider The Credit Pros. They offer easy-to-read credit reports and personalized score insights to help you overcome your specific challenges and achieve your financial goals. Whether you need assistance with credit report corrections, increasing your credit score, or establishing credit from scratch, their experienced professionals are ready to guide you through the process.
At The Credit Pros, customer satisfaction is their top priority. That is why their services have affordable pricing and no binding long-term contracts. They are accredited by the Better Business Bureau and have an excellent Trustpilot rating, demonstrating their reliability and trustworthiness. Additionally, they offer a 100% 90-day money-back refund policy, giving you peace of mind knowing that your satisfaction is guaranteed.
Take the first step towards improving your credit by completing a short form today or call (727) 306-8201. One of The Credit Pros’ experienced credit specialists will contact you to discuss how they can help you achieve fast and effective results.
Frequently Asked Questions
Credit builders are loans designed specifically to help you build credit and can help you meet your credit goals sooner. They work by lending you money that is secured in a bank account until the loan term is completed and you’ve made all your payments on time. While not instantaneous, it’s a structured way to improve your credit.
Similar to credit builder loans, secured credit cards are another great tool for building credit quickly. With a secured card, you provide a deposit that serves as your credit limit. This deposit acts as collateral for the card issuer. As you use the card and make payments on time, those activities are reported to the credit bureaus, helping to build your credit history. Over time, with consistent, responsible use, a secured credit card can help improve your credit score, and you may eventually be able to upgrade to a regular, unsecured credit card.
Ensure you pay all your bills when they’re due, as your payment history is crucial. Even a single late payment can negatively impact your score, so set reminders or automate payments if necessary.
Also, keep your credit card balances well below the limits. A common recommendation is to use less than 30 percent of your total credit limit, as high utilization can signal to lenders that you’re overextended and may negatively affect your score.
If you can, pay down your balances, and if you’re carrying a balance, try to make payments more than once a month to keep the balance lower throughout the billing cycle. This can help improve your credit score more quickly, as it demonstrates your ability to manage credit responsibly.
Furthermore, periodically request credit limit increases. Doing so can help reduce your overall credit utilization ratio, provided you don’t increase your spending.
Below are four simple but effective ways to improve your credit score:
1. Lower credit card balances: Keep your credit card balances low compared to your credit limits—a strategy known as credit utilization.
2. Increase your credit limits: Ask for higher limits on your credit cards, but avoid utilizing the extra credit provided to maintain a low utilization ratio.
3. Secure authorized user status: Consider becoming an authorized user on someone else’s credit card, which can add their positive payment history to your credit report.
4. Diversify your credit profile: Add a mix of credit types to your history, such as retail accounts, installment loans or finance company accounts, but only if it makes financial sense for you.
If you don’t have credit, consider starting with a secured credit card or a credit builder loan, which requires security deposits or savings as collateral, reducing the risk to the lender. Be diligent about making timely payments and keep balances low relative to your limits to establish a history of responsible credit management.
In addition to secured credit cards and credit builder loans, you can also build credit quickly by becoming an authorized user of someone else’s credit card. This can be a family member or a friend who has a good credit history. When you’ve added as an authorized user, the account’s credit history may be reported on your credit report, which can help to build your credit score if the account is
managed well.
It’s also beneficial to report your rent and utility payments to credit bureaus if possible. Some services and third-party companies offer this service, which can add a positive payment history to your credit report.
Most importantly, regularly review your credit reports to ensure accuracy and to keep track of your progress. You’re entitled to a free credit report from each of the three major credit bureaus on a weekly basis at AnnualCreditReport.com. This can help you spot errors or fraudulent activities early on and address them promptly, which is important for maintaining a good credit score. Remember, building credit takes time and patience. But by following these steps, you can establish a strong credit history that will benefit your credit health and pave the way to a brighter financial future.
