Advice
Building credit is crucial but often misunderstood. A good credit history opens doors to favorable loan terms, better credit card rewards, and even helps with securing leases or job offers. The trick is figuring out how to start, especially when the banking jargon makes it feel like learning a foreign language. But don’t worry—we’re here to help. Here are some straightforward tips on how you can build credit and plan for future success.
Why Building Credit Matters
Your credit score impacts several key areas of your financial life. When you apply for a mortgage, car loan, or even a cell phone plan, companies look at your credit score to determine whether you’re likely to pay back what you owe. Good credit can get you lower interest rates, saving you thousands over the life of a loan. But remember, good credit isn’t just about getting approved for a loan; it’s about creating financial flexibility. Imagine getting approved for a mortgage at a low interest rate because you have a stellar credit history—that’s the kind of long-term benefit you’re working toward.
Start with a Secured Credit Card
If you’re just starting out, a secured credit card can be a good stepping stone. Secured cards require a cash deposit upfront, which typically sets your credit limit. For example, if you put down $500, that’s your spending limit. While it may sound restrictive, it’s actually a great way to demonstrate responsible credit use without risking overspending. Pay off the balance each month, and the issuer will report your activity to the credit bureaus. Over time it will build up your credit score.
Using a secured credit card consistently builds your score, which eventually can get you approved for an unsecured card, which doesn’t require a deposit. Many people graduate from secured to unsecured credit cards within a year or so of good payment history.
Consider a Credit-Builder Loan
A credit-builder loan is another option for building credit. Unlike a traditional loan, where you get a lump sum and repay it over time, a credit-builder loan is designed to help you save and build credit simultaneously. Here’s how it works: Instead of getting cash upfront, your “loan” amount is set aside in a savings account. You make monthly payments, and once you’ve paid off the “loan,” you receive the full amount.
This setup allows you to build a positive payment history, which makes up a large part of your credit score. It also gives you a small savings boost at the end of the loan term, which you can put toward an emergency fund or a future investment.
Become an Authorized User on Someone Else’s Card
If you have a family member or close friend with good credit, consider asking them to add you as an authorized user on their credit card. As an authorized user, you get to benefit from their positive credit history, which can add a boost to your score. Just keep in mind that your credit is somewhat linked to theirs in this arrangement. If they miss payments or rack up a high balance, your score could be affected. However, if both of you manage the account responsibly, this can be an excellent shortcut to establishing a solid credit history.
Manage Your Credit Wisely
Building credit isn’t just about opening accounts—it’s about managing them wisely. Here are some habits to adopt early on:
Make On-Time Payments Every Time
Payment history is the largest factor in determining your credit score, so every on-time payment counts. Late payments can significantly hurt your score and take a long time to recover from. Setting up automatic payments or calendar reminders can be a lifesaver for busy schedules. If you’re paying off a student loan or credit card, prioritize making payments on time, every month, no matter what.
Keep Your Credit Utilization Low
Credit utilization—the percentage of your available credit you’re using—is another major factor in your score. Aim to use less than 30% of your total available credit at any time. For instance, if you have a $1,000 limit, try not to carry a balance above $300. Lower credit utilization signals to lenders that you’re not overly reliant on credit, which can improve your score over time.
Limit Credit Applications
Every time you apply for new credit card, lenders perform a “hard inquiry” on your report, which can temporarily lower your score. While a few inquiries won’t drastically hurt, too many in a short period can make you look like a risky borrower. Try spacing out applications for credit cards or loans by at least six months to avoid an unnecessary dip in your score.
Expand Your Credit Profile Over Time
Lenders like to see a diverse credit mix, which might include credit cards, installment loans (like car or student loans), and other credit accounts. While you don’t need to open accounts just for variety’s sake, diversifying can be beneficial as your financial life evolves. If you’re already paying down a student loan, for instance, that’s a positive addition to your credit mix.
Keep Older Accounts Open
It seems strange, but you should avoid closing old accounts if possible. Even if you don’t use a particular credit card often, keeping it open and in good standing can contribute positively to your score. A long-standing credit account demonstrates reliability to lenders and builds your credit over time.
Use Alternative Data to Boost Your Score
You can also take advantage of alternative data to give your credit score an extra boost. Some services, like Experian Boost, allow you to add on-time payments for utilities, rent, and other bills to your credit report. This can be especially helpful if you’re just starting out and want to showcase your ability to manage payments responsibly.
Monitor Your Progress
Stay on top of your credit score by regularly checking your credit report. This way you can quickly spot any errors that could cause problems. The three major credit bureaus (Experian, Equifax, and TransUnion) each provide a free credit report once a year. And 1st Source Bank clients can check their credit score through the online banking page or the 1st Source Bank app.
By keeping an eye on your score, you’ll know exactly where you stand and can take proactive steps to improve it. And reviewing your report also gives you a chance to make sure that nobody has opened fraudulent accounts in your name.
Building Credit for a Strong Financial Future
Building credit takes time and patience, but the results are well worth the effort. Strong credit can save you significant money in the long run, whether you’re getting a mortgage, buying a car, or even financing a small business. Start with small steps: open a secured card, consider a credit-builder loan, and always make on-time payments. As your credit grows, so does your access to favorable financial options that can help you achieve life’s big goals.
With the right habits in place, you’re on your way to a credit score that opens doors. The journey to solid credit may take time, but each step brings you closer to financial freedom and a world of opportunity.