The Importance of Establishing Your Credit
Your credit history impacts more areas of your life than you may realize. It is established using your history of opening credit-based accounts, paying your bills, and living within your financial means. Organizations that review your credit score are not limited to just banks and credit card companies. It can be pulled by phone companies, prospective landlords, and even some employers. This is because your score tells these businesses what kind of consumer you are and if you meet the standards they have set for their customers and/or employees. No matter your life stage, building your credit history will make applying for and getting credit easier. It can also cost you less in the long run.
How a credit score works
Your credit score is developed by three main credit reporting agencies – Equifax, TransUnion and Experian. These credit agencies have developed their own proprietary scores, but all three have access to the same reporting data and are generally in the same ballpark when it comes to predicting credit risk and worthiness.
The three companies look at a number of factors to determine your score:
- Payment History: Do you pay your bills on time and avoid late payments?
- High Debt to Income Ratio: Your debt to income (DTI) ratio is a percentage calculated by dividing your total monthly debt payments by your monthly income. A high DTI tells lenders that you are maxed out on credit, which lowers your score.
- Types of Accounts: Have you opened too many retail accounts, same as cash offers, or balance transfer accounts?
- Credit History: The longer your credit history, the more data is available to determine your score.
- Credit Inquiries: Are you applying for too many lines of credit in a short amount of time?
These factors, combined with other credit history metrics, are used to create your credit score. The following credit score ranges rank individual scores on a scale of poor to exceptional:
350 – 629: Poor
630 – 689: Fair
690 – 719: Good
720 – 799: Very good
800 – Up: Exceptional
How to start building your credit score
There are a few simple ways to start and build your credit. Whether you are young and just getting started, or you don’t have a credit history for lenders to consider, take the following into account.
- Pay your bills on time. Not only are standard credit cards bills taken into account, but also utility bills like gas, electric and cell phone bills may be reported to the credit reporting agencies. Paying these bills on time can help build a positive credit history.
- Apply for a secured/pre-paid credit card. A secured credit card is backed by money that you deposit into an account, which can be used like a regular credit card. Spending within your limit builds history and demonstrates that you are financially responsible.
- Get a vehicle loan with a co-signer. Buying your first new or used car can be exciting – until you are denied for the loan. Adding a co-signer can help you qualify for a loan, and with timely payments you can build your credit to help you get that next car loan on your own.
- Make your student loans a priority. One of the few loans that a young person will qualify for on their own is a student loan. Keeping your student loans current and paid on time is a great way to build your credit.
How to repair your credit score
If you have lapses in your minimum payments or have had an account placed in collections, you might have a lower credit score. Poor credit scores don’t happen overnight, neither does rebuilding those scores. It will take time, determination and discipline to rebuild your score. In addition to paying your bills on time, there are a few steps you can take to repair your credit score.
- Review your credit report. You need to understand what is pulling your score down. The credit reports provide details of each account and the incidents that are hurting your credit history.
- Dispute inaccurate information. If you find inaccurate information, make sure to open a formal dispute with the credit reporting agency to have that record reviewed and removed.
- Create a plan to pay your minimums on time. Paying your existing accounts on time will build a positive credit history as the negative incidents start rolling off. If you have too many accounts to stay current or your combined minimums are too high, consider a balance consolidation to a low interest credit card or an equity-based loan like a mortgage refinance or home equity loan. This consolidation reduces the number of bills to pay and creates a more manageable monthly payment.
- Avoid opening unnecessary accounts. Keep your credit inquiries to a minimum and avoid opening any new or unnecessary accounts. The exception would be if you are looking for opportunities to consolidate your accounts into a low-interest credit card or loan as discussed above.
- Ask for help. Financial counseling is a great way to get your finances in order. A financial counselor can work with you to establish a budget and prioritize your monthly payments to keep your credit building plan on track.
Financial counseling gets you on-track
You can get a free credit report at www.annualcreditreport.com. Plus, you can stop by a KEMBA Financial Credit Union branch today for more advice on how to improve your credit score and overall financial position. KEMBA members even have access to free financial counseling, as well as a variety of resources intended to help individuals improve their financial lives. Call a KEMBA Member Service Representative today at 800.282.6420, option 4 to learn more.