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The Quick Guide to Building Your Credit

There's a reason credit is such a hot topic in the personal finance field. Having a good credit score provides you with the freedom to qualify for a mortgage, auto loan, personal loan, and even credit cards at a low interest rate. When you struggle with a low credit score, you are penalized with high-interest rates meaning you pay more for what you borrow. Some cell phone and utility companies even base their pricing and requirement for a deposit based on your credit.

If you know your credit is holding you back from being able to make certain financial choices, it's time to get serious about improving your credit. No matter your starting point, anyone can do it. It just takes time, patience, commitment, and a plan. 

Here is Your Guide to Building Credit

Get A Credit Card
Getting a credit card will help you build your credit if you use it wisely. That means keeping your utilization rate below 30%, making your payments on time, and not applying for too much credit. You might be wondering how you can get a credit card when you're struggling with bad credit.  The truth is that there are options for you no matter where your credit falls on the scale. 

Finding A Credit Card
To find a credit card that works for you, start at your local credit union or financial institution. Most offer several options if you currently have a relationship with them. The most important thing to consider when you get a credit card is your interest rate. You want it to be as low as possible. Also, make a note of the Annual Fee and your Credit Limit. If you can, you want to find a card that doesn’t have a yearly fee. You also want to know your credit limit, so you don’t go over your 30% utilization rate.

Unsecured Credit Card
If your credit is lower than you'd like, but you can qualify for a traditional unsecured credit card, get one. But, have a plan before you start using your card. It's essential that you keep your utilization rate below 20-30%, so it doesn't negatively impact your credit. The credit bureau doesn't care that you use your credit card. They want to see that you're not maxing out your cards because it's an indicator that you can't afford your lifestyle.

Secured Credit Card
You might be in a position where you can't qualify for a traditional unsecured card; in that case, you should apply for a secured credit card. A secured credit card requires that you make a deposit equal to the amount you can spend on your card. You typically have very low usage, generally around $250. The idea behind this card is that if you fail to pay your balance, the company can keep your deposit, so they're not losing anything. However, if you show financial responsibility with your secured credit card, over time, you will see an increase in your credit score, and eventually, qualify for an unsecured card.

Secure A Loan
Another option when building your credit is to get a loan. A loan, similar to a credit card, is an official way to demonstrate that you can pay back the money you borrow on time, which is ultimately what your credit score indicates.

Finding A Loan
When looking for a loan, again, start at your local credit union or financial institution. Credit unions are known for offering lower interest rates, which will help reduce your monthly payments. With the number of loan options available, you want to pay attention to the details. Knowing your interest rate is crucial. You can expect to have a higher rate as you’re building your credit. However, you should still search for the best option possible. 

Also, make a note of any prepayment penalties or origination fees. Make sure you can pay off your loan early without being penalized. Some companies will require that you pay an origination fee, which covers the cost of processing the loan. If you can, avoid paying an origination fee. When you get your first loan, start small, and be sure you can afford to repay it.  This strategy will only be beneficial if you make your payments on time each month.

Unsecured Loan
If you can qualify for an unsecured loan, like with the credit card, get one. But only get a loan for an amount that you can quickly pay off. What's better is to get a loan and place it in a savings account then pay it back over time. You don't have to use the money for anything. In this situation, you can use it solely as a tool to build your credit. 

Secured Loan
A secured loan is an option if you are building your credit as it requires that you put up collateral in case you default on your loan. Companies do this, so in case you fail to pay, they can recoup on the amount you borrowed. You can put up an asset as collateral, such as your home or vehicle. Again, be sure not to borrow more than you feel comfortable paying back.

General Tips for Building Credit
Getting a credit card or loan are great ways to build your credit, as long as you use them responsibly. Here are additional sound-financial practices to implement as you work towards improving your credit.

Make Your Payments On Time
No matter what, you need to make at least the minimum payment on your accounts. Making late payments, even one can decrease your credit score. Late payments can also increase your interest rate leading to you paying more over the length of your loan or for the amount charged to your credit card.

Keep Your Accounts Open
While you might be tempted to close your credit card account once it's paid off, it's best to keep it open. Even if you don't use your card for significant purchases making a small purchase monthly for gas or charging one of your subscription services to your credit card will keep it active. 

Pay More Than the Minimum
Minimum payments are just that; the minimum amount you have to pay each month according to the company you borrow from. Quite often, the minimum payment doesn't make much of a dent on the principle you owe.  Instead, it covers more of the interest owed on the account. That's why you can make minimum payments for years and it does not have that big of an impact on how much you owe. Credit cards now indicate on your monthly statement how long it will take to pay off your debt if you only pay the minimum. This is a great guide to building credit, but also maintaining it. In some cases, it can take years, even more than a decade to pay off a debt if you only pay the minimum amount, so be mindful.

At Best Reward Credit Union, we want to see you improve your personal finances, starting with your credit score. We won't penalize you with absurdly high interest rates and fees because you're building your credit. Instead, we offer a variety of services and resources to support you on your credit journey.

Credit Resources