Building credit can be tricky. If you don’t have a credit history, it’s hard to get a loan, a credit card or even an apartment. But how are you supposed to show a history of responsible repayment if no one will give you credit in the first place?
Building credit is wise for just about everyone, but it’s not something you can do overnight. It may take around six months for positive credit actions to have an impact on your credit score, so waiting until you’re ready to buy a house or finance a car is too late.
Use your credit card better
A well-known catch-22 of credit-building is that good credit allows you to borrow money, but you need to be able to borrow money to establish good credit. It’s important to understand that debt is not a requirement for building credit. Your goal here is just to show your track record of making payments. The easiest way to do this without going overboard is to use a credit card only for specific recurring expenses, then set up an automatic payment each month.
For example, instead of using a credit card for daily expenses and possibly running up debt, put your monthly power bill or streaming subscription on the card. That way you aren’t spending more than you would otherwise, but you’re still building credit and avoiding interest.
Practice good credit habits
Building a good credit score takes time and a history of on-time payments. To have a FICO score, you need at least one account that’s been open six months or longer and at least one creditor reporting your activity to the credit bureaus in the past six months. Practice these good credit habits to build your score and show that you’re creditworthy:
- Make 100% of your payments on time, not only with credit accounts but also with other accounts, such as utility bills. Bills that go unpaid may be sold to a collection agency, which will seriously hurt your credit.
- If you use credit cards, keep your credit utilization low — utilization is the percentage of your credit limit you use. We recommend keeping your credit utilization below 30% on all cards.
- Avoid applying for multiple credit accounts close together; applications for credit can cause a small, temporary drop in your score. Multiple applications can cause significant damage.
- Keep credit card accounts open. Unless you have a compelling reason to close an account, consider keeping it open. Closing an account can hurt your credit utilization and reduce your average account age.
Check your credit scores and reports
A credit report is a record of how you’ve used credit in the past. Your credit scores predict how you’ll handle credit in the future, using the information in your credit reports. You’ll want to monitor both to watch for errors and to see your credit-building efforts pay off.
Members of the credit union have access to their daily credit score and monthly credit reports for free in Online and Mobile Banking. Make sure to check each regularly for errors and discrepancies. You can even dispute any errors you find that might be lowering your scores directly from our Mobile Banking app.
Having good credit (or credit scores of 690 or higher) expands your financial options, and while building credit isn’t always easy, it’s not as complicated as many people think. If you’re interested in improving your credit standing but are unsure where to start, reach out the Member Services for custom solutions today!