Build and improve your credit score

A good credit score can play a huge role in your financial success and financial wellness. It can help you:

• Get approved for credit cards
• Establish cell phone service
• Rent an apartment
• Obtain lower rates on car insurance premiums
• Get a certain type of job
• Secure a loan to buy a house, car, or other major purchase
• Qualify for the best interest rates and terms on credit cards and loans

Your ability to reap the benefits above will decrease if your credit score is low, you have negative information on your credit report, or you have little to no credit history — also known as a “thin credit file.” Those most affected by a thin credit file are: 1) people who are new to the lending industry — typically, those in their late teens or early twenties; 2) individuals who have used cash most of their lives; 3) people who are new to the country.

How Do You Establish Credit?

Here are five ways to build your credit. The first four options might be available through your credit union or bank.

** Co-signed accounts for credit cards or loans: You could take out a small loan or open a credit card by having someone with an established, exceptional credit history and score co-sign for you. Make sure your co-signer understands the risks involved. If you don’t make regular, on-time payments or default on the loan, they will be on the hook for the full amount owed, and their credit score can be damaged.

** Credit builder loans: This is like a savings plan that builds credit. You receive a loan for a specific amount of money which is deposited and held by the bank or credit union as a certificate of deposit. After making on-time, monthly payments for a set period, you establish a positive payment history and you receive the full amount of the loan, plus interest earned and minus any fees.

** Secured credit cards:  A secured credit card is backed by a cash deposit you make up-front. Typically, your credit limit will be equal to the deposit amount. This card can be used like any other credit card. Use the card for purchases, then make your payment by the due date. It is best to pay the full balance due to avoid any interest charges. Since a cash deposit is required for a secured credit card, your chances of getting approved are very good. 

** Authorized user: This is where someone else adds you to their credit card as an authorized user. The primary account holder is responsible for paying charges on the account, not the authorized user. If you cannot qualify for a credit card on your own, this option can help you beef up your credit history. However, obtaining your own credit accounts will have a greater impact.  

** On-time rental payments: If you are a renter with a good payment history, you may want to talk to your landlord or property management company to see if they report your payment history to the credit bureaus. If they don’t, look into a rent payment service that will report your payments, which would help you create a positive payment history.

How Do You Build on Your Current Credit Score?

• Pay at least the minimum amount due by the due date each month. Late payments account for 35% of your credit score, and one delinquent payment can substantially lower your score.
• Your “utilization rate”, or your balances in relation to your credit limit, accounts for 30% of your credit score. Therefore, it’s smart to keep your balances low or less than 30% of your credit limit, helping you maintain a good credit score.
• Avoid applying for multiple accounts in a short period of time. Each time you apply for credit, a creditor will pull your credit report to see how much risk you pose as a borrower. Each look is called a “hard inquiry.” Too many hard inquiries can negatively impact your credit score, though this impact will fade over time. Hard inquiries remain on your credit report for two years.
• Maintain a positive credit history over long periods of time.
• Dispute any inaccurate information.

What is a Good Credit Score?

The FICO score is the most commonly used credit score by lenders when issuing loans and determining interest rates. Most scores range from 300-850. A score above 800 is exceptional; 740-799 is very good. And scores between 670-739 are considered good.

How Are Credit Sores Determined?

• 35% — Payment history
• 30% — Credit usage
• 15% — Length of credit
• 10% — Recent activity
• 10% — Types of accounts

How Often Do Credit Scores Change?

Lenders typically report both positive and negative information to the credit bureaus once per month. As a result, your credit score can change a bit each month, depending on what is reported. Late payments or an increase in credit utilization might create a drastic drop in your credit score.

How Often Should You Pull Your Credit Report?

You should obtain a free copy of your credit report from all three credit reporting agencies (Equifax, Experian and TransUnion) at annualcreditreport.com. You can request free reports once a week from each agency. Be sure to check each report you receive, and dispute any incorrect information.

If you'd like to review your credit report and/or want more advice to help improve your credit score, call LSS Financial Counseling at 888.577.2227 to set up a free, confidential appointment with one of our experienced financial counselors.

Tasha Symiczek is a Certified Financial Counselor for LSS Financial Counseling.