Building credit is a process that remains a mystery to many people. How can you build credit if no one extends credit until you have credit?
The good news is that it is not that difficult to build credit. The bad news is that it takes time, patience, and persistent effort to make your payments on time, keep your payments current, and avoid the temptation to spend beyond your means. In other words, discipline is an essential tool for building good credit.
Here are five tips you can apply to help you in the process of building your credit.
#1) Obtain & Use a Secured Credit Card
If you’re just starting to build credit, a secured credit card is a great option. It functions the same as a normal, unsecured credit card with one significant difference – you put money aside with your financial institution to cover the balance should you not be able to make the monthly payments.
For example, if you have a $500 secured credit card with your financial institution, a hold will be placed on $500 in your account. This amount could be from your Savings Account, Money Market Account, or required upfront in a separate account held by the lender (each financial institution will have different requirements). If you’re unable to repay your credit card balance, the financial institution will use the money put aside to cover the payments.
A secured credit card is a great tool when learning to manage credit card spending and monthly payments. Plus, when used responsibly, your credit score will rise, allowing you to qualify for an unsecured credit card in the future.
#2) Focus on Secured Loans
Secured loans, such as auto loans and home loans, have collateral tied to them. If you’re unable to make your auto loan payments, the lender may repossess the vehicle to recover some of the losses from the unpaid loan.
These types of loans are lower risk for financial institutions, and when managed responsibly, are a golden ticket for building your credit.
#3) Avoid Having Too Much Unsecured Debt
Opposite of secured loans, unsecured loans are those without any collateral. Examples include credit cards and personal loans. Having too much of this type of debt can be detrimental to your credit ? and leave you vulnerable to even minor financial setbacks when they occur. Plus, they often carry much higher interest rates than secured loans and credit cards have indefinite terms that can make paying off your balances a challenge.
#4) Pay Attention to Available Credit
When attempting to build credit, your available credit is more important than you may realize. Lenders call this credit utilization, and they use this figure to gauge how well you manage credit extended to you.
For example, if you have a credit card with a $1,000 limit and you have a $200 balance on the card, your credit utilization is 20 percent. Lenders prefer to see this number at 30 percent or below, so in this situation, that’s a good number.
It’s important to note if you have multiple credit cards or other lines of credit, your goal should be to keep the number below 30 percent for all. Take a look at our quick video around the basics of credit for more information.
#5) Pay Off Credit Card Balances Monthly
Credit cards are a convenient payment option. However, when learning to manage credit card debt and build your credit, you should strive to pay off the full balance each month. Doing so will help you avoid possible high-interest rate charges and let you know you’re staying within your budget.
You do need to spend money on your credit card each month, though, to build your credit history. Many people trying to establish credit will use their credit card for only small purchases, such as buying gas for their car. This is an excellent option as the dollar amount is usually low enough that it’s easy to repay in full each month.
We’re Here to Help!
Building a great credit score and history takes time and effort. A secured credit card is an ideal first step in learning to manage debt or rebuild your credit. Looking for additional resources? Learn how to understand credit and how to build yours right the first time with our eBook and check out our Financial Wellness Toolbox!
© Genisys Credit Union and www.genisyscu.org, 2021. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Genisys Credit Union and www.genisyscu.org with appropriate and specific direction to the original content.