building credit

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• Credit refers to a person's ability to borrow money or access goods or services with the understanding that they will pay for them later. It is based on trust that the borrower will repay what is owed. 

• Building credit means establishing a record of responsible borrowing and repayment, which helps demonstrate to lenders that you are reliable in managing debt. Building and maintaining good credit is crucial for financial stability as it impacts loan approvals, apartment and home rental applications, and credit card eligibility.

• As you establish a record of borrowing and repayment, you are given a Credit Score, a number which represents how trustworthy you are, gives future lenders an idea of how likely you are to repay a loan, and is used by rental properties as a factor in approving or disapproving your application to rent an apartment or home. 
  • Credit scores range from 300 to 850, with higher numbers being better.
  • A score of 700 or higher is excellent, while a score below 600 is very poor.

• The best way to begin building credit is to save up some money and take it to a local bank for a secured credit card. A secured credit card is backed by a cash deposit from you. 
  • Once you have it, use the secured credit card for items you purchase but ensure to pay it on time each month. 
  • Also pay any other bills you have on time, as payment history is the most significant factor in your credit score.
  • Over time, your credit score will improve and you will be able to get traditional credit cards where a cash deposit is not required. 
  • In addition to getting a secured credit card, you can also become an authorized user on someone else’s credit card to benefit from their good payment history. This isn’t as effective as a secured credit card but can help. 

• Once you have established some credit, you need to continually build on it in order to maximize your score. You can accomplish this by: 
  • Always making your payments on time.
  • Keeping your credit utilization below 30% of your credit limit. 
  • Expanding your credit with a mix of credit cards and loans.
  • Avoiding closing accounts so you have a longer history of credit.  
  • Not attempting to open too many lines of credit within a short period of time. 

• Reversely, you need to ensure you are not doing things that are hurting your credit and lowering your score. This can occur if you:
  • Miss payments or are late with payments.
  • Have a high percentage of your credit used (over 30%).
  • Close old credit cards as it reduces your overall amount of credit available and shortens your history of credit.
  • Apply for too much credit in a short period of time. 

Credit is an essential component of financial stability and plays a significant role in your ability to rent an apartment, buy a car, get a mortgage, and even secure certain jobs. Understanding how credit works, how to build and maintain it, and what can harm it is key to making informed financial decisions.

This summary will break down the core principles of credit, providing simple and actionable steps to help you build and protect your credit score.

What is Credit?

Credit is the ability to borrow money or access goods and services with the promise to repay later. It is based on trust between the borrower and the lender. Your creditworthiness is typically measured by your credit score, a numerical representation of how reliably you manage debt.

Your credit score affects many aspects of life, including:

• Renting an apartment
• Buying a car or home
• Getting a credit card
• Qualifying for loans
• Determining loan interest rates
• Even employment opportunities in some industries

Understanding Credit Scores

Your credit score is a three-digit number ranging from 300 to 850, with higher numbers representing better creditworthiness. Here’s how credit scores are generally categorized:

• 800 – 850 (Excellent): Exceptional credit history, best loan terms and lowest interest rates.
• 740 – 799 (Very Good): Strong credit history, likely to receive favorable terms.
• 670 – 739 (Good): Considered a reliable borrower, most lenders approve loans.
• 580 – 669 (Fair): Some lenders may approve, but interest rates will be higher.
• 300 – 579 (Poor): High risk for lenders, difficulty getting loans or credit cards.

How is Your Credit Score Calculated?

Your credit score is based on five key factors, listed in order of importance in terms of their individual impact on your credit score:

1. Payment History – Paying bills on time is the most significant factor in your score.
2. Credit Utilization – Using too much of your credit limit can negatively affect your score. Keep utilization below 30% of your available credit.
3. Length of Credit History – The longer your credit accounts have been open, the better.
4. Credit Mix – Having different types of credit (credit cards, loans, mortgages) demonstrates responsible financial management.
5. New Credit Applications – Applying for multiple credit lines in a short period can lower your score temporarily.

How to Start Building Credit 

If you don’t have a credit history yet, here’s how to start:

                 1. Get a Secured Credit Card:

• A secured credit card requires a deposit that acts as your credit limit.
• You can apply for a secured credit card at most major banks or credit unions, such as Chase, Capital One, Discover, or local credit unions.
• Use it for small purchases and pay it off in full each month to start building credit.

                2. Apply for a Credit-Builder Loan:

• Credit-builder loans are small loans designed to help you build credit.
• These loans are available at many credit unions, online banks, and community financial institutions.
• With a credit-builder loan, the lender holds the loan amount in a secured account while you make monthly payments. Once fully paid, the money is released to you, and your successful payments are reported to credit bureaus.

               3. Become an Authorized User:

• A trusted family member or friend can add you as an authorized user on their credit card.
• You benefit from their good payment history without being responsible for the debt.

              4. Pay Your Bills On Time:

• Utility bills, rent, and phone payments may not always be reported to credit bureaus, but missing payments can negatively impact your financial reputation.

How to Continue Building and Improving Credit

Once you’ve started building credit, the next steps are:

            1. Keep Your Credit Utilization Low:

• Try to use less than 30% of your credit limit. Example: If your credit limit is $1,000, keep your balance below $300.

            2. Diversify Your Credit:

• Having different types of credit (credit cards, installment loans, mortgages) can improve your score.

            3. Increase Your Credit Limit:

• As your credit score improves, you can request a credit limit increase, which helps lower your utilization percentage.

            4. Avoid Closing Old Accounts:

• Keeping older credit accounts open helps maintain a longer credit history, which is beneficial for your score.

            5. Limit New Credit Applications:

• Too many hard inquiries in a short time can reduce your score.

Common Mistakes That Hurt Credit

To protect your credit, avoid these common mistakes:

• Missing Payments: Late or missed payments negatively impact your credit score.
• Maxing Out Credit Cards: High balances can lower your score.
• Closing Old Accounts: Reduces credit history length and available credit.
• Applying for Too Many Credit Lines: Multiple applications in a short time can temporarily lower your score.
• Defaulting on Loans: Unpaid loans can severely damage your credit and take years to recover from.

Final Thoughts

Credit is a powerful financial tool that, when used wisely, can open doors to better financial opportunities. Understanding how credit works and consistently making responsible decisions will set you up for long-term success.

By following the strategies outlined in this guide, you can establish, build, and maintain excellent credit, ensuring financial flexibility and stability for years to come.