The Importance of Good Credit
If you ever hope to get a home loan or auto loan, you’ll need good credit. Many landlords even require good credit to rent an apartment. Your credit history may be used for other things like calculating car insurance premiums, apartment rental applications, and even employment screening.
Building Over Time
You can build a good credit score in just a year or two, but it can take up to seven years to build a credit score of 750 or higher. Most consumers with credit scores in 800 or better range have at least 10 years of credit history. The longer your accounts have been open and in good standing, the better your credit will be.
Accounting Several Accounts
It’s possible to build good credit in just a few years, but it requires opening at least a few accounts of loans and credit cards and being diligent about making payments on time. The shorter your credit history, the more a single late payment will set you back. You can build credit quickly by starting with one account, then gradually adding new credit cards or other accounts every six months. This method will only work if you are very careful about paying every account on time.
All About Credit Bureaus
The first step is to open an account that reports your payment history to the credit bureaus which are Equifax, Experian, and TransUnion. They keep databases of credit history and house this information in reports and scores to sell to banks, landlords, and employers.
It’s important to check all three of your credit reports at least once a year. For the most part they collect similar information, although each may track this information differently, and there may be discrepancies on your credit history with each.
- Accounts that report to credit bureaus are store credit cards, installment loan accounts and major credit cards.
- Accounts that do not report to credit bureaus are utility and phone bills, rent payments and debit cards. Even if you have a checking account, an apartment, and a cell phone, you may not have a credit history.
More Credit = Higher Score
A good credit score is earned by managing credit well and until you prove that, the credit bureaus don’t have any way to predict what kind of credit risk you will be. Showing you can manage a few different credit accounts ensure you maintain good credit. The second reason this will help is for what’s called your debt utilization ratio. This is the percentage of the credit limits on all your credit cards that you’ve currently borrowed against. For example, if you have two credit cards with $1,000 limits, you have a total credit limit of $2,000. If you have a $500 balance between the two cards, your utilization ratio is 25%. Therefore, you have used 25% of your total credit limit. With utilization ratios, lower is better, and a high ratio will decrease your credit score.
There are a few ways to improve this number
- Only use a small percentage of your credit line.
- Pay your card balances down before the closing of the statement cycle.
- Increase your available credit.
Your First Credit Card
The only things you should do with your credit card are use the card occasionally on purchases you know for certain you can pay back in full and pay the bill on time every month. Ensuring consistent payments is the most important part of building credit. Missing your payment just once can set you back a year or two. Treating your new credit line like free money and then only paying the minimum balance is asking for trouble when you realize you owe hundreds at a high interest rate.
Regardless of the route you take to good credit, remember that the most important thing is making timely payments, whether on a secured card or a credit-builder loan. From personal loans and vehicle loans to several mortgage options, Solidarity is always here to help you on the path to a solid credit score. An account with Solidarity gives you Online Banking services through Savvy Money that allow you to view your credit score at any time. It can also send you alerts on transactions and give you tips on how to improve your credit score. It’s free with Solidarity! Learn all about it at our Credit Sense page!