Credit: How to Get It and How to Improve It
Establishing Credit
Financial institutions will typically want to see at least 6 months of credit history before they will grant any type of credit-based products. You might wonder, how do you even establish credit then? Fortunately, there are some ways to do so. Here are some common activities that can help establish credit.
- Apply for a secured credit card through your bank or credit union.
- Acquire a gas or retail card which should be easier to get than a general-purpose credit card.
- Get a credit product with a cosigner who does have established credit.
- Become an authorized user on another person's credit account. Be sure to check with the financial institution to see if it reports that activity to the credit bureaus, since some will and some will not.
Most lenders use the FICO scoring model, which ranges from a score of 300 to a score of 850. Most lenders see a score of 750 and above as excellent. The better the score, the better rates and terms you could be granted on your credit products. A good score can also help you with getting a job, receiving better insurance rates, and qualifying for a rental unit when looking for a place to rent. Credit has a significant impact not only on your finances but also on your life in general.
Credit Score Breakdown1
- 35% of your score is about your payment history. Make your payments on time, and don't miss any. If you do, you could see a significant hit to your score.
- 30% is about the amount you owe. Creditors will look at how much of your available credit are you using. For example, if you have a credit card with a balance of $5,000 and a credit limit of $5,500, your score will be taking a hit. This is called the credit utilization rate. In this instance you would be using 91% of your available credit on that credit card. It is recommended to keep that number below 30% in order to not be negatively affected.
- 15% is about the length of your credit history. The longer the positive history, the better the score. A recently opened credit product won't be able to show how responsible you are with credit in the long run.
- 10% is about new credit requests. If you are applying for new credit frequently or during a short period of time, this could negatively affect you. It shows that you are potentially a greater risk.
- 10% is about the types of credit in use. If you have multiple types of credit products and are being responsible with them all, it can help your score. An example would be having a credit card, retail account, installment loan, and mortgage.
It is also wise to manage other areas of your finances in order to make sure negative information doesn't appear on your credit history. This will include things like paying your bills on time so they aren't sent to collection, building a savings account up (since some lenders will take that into consideration when granting credit or not), and making sure not to overdraft on a checking account.
Improving a Poor Credit Score
It's important to know that typically, there is no quick fix to a poor credit score. It takes time and being responsible with the current credit products you might have or new ones you decide to open. Be patient, but know that a poor score can be fixed.
There are many different factors that hurt a credit score. Maybe several payments were missed, but then you caught up. Maybe some accounts were sent to collection. Your home could have been foreclosed on, or maybe you went through a short sale. Perhaps you filed bankruptcy or had a tax lien placed against you. It's also possible that there are errors on your report that are hurting your score. If that is the case those errors need to be disputed. All of these activities can significantly hurt your credit score, but here are some tips to improve it.
- First, get a free copy of your credit report from http://www.annualcreditreport.com/ and make sure that it is accurate. If you find errors you can dispute them.
- If you have credit payments to make, start making those on time and keep current on them moving forward.
- If items have gone to collection, negotiate with those agencies to resolve the debt. Paying off the debt won't necessarily raise your score much, but it will look better to a lender and will also save you from the possibility of being sued for that debt. Keep in mind that paying off the collection debt won't remove it from your report. Negative information can stay on your report for 7 years.
- If you have high balances on your credit cards, start paying those down. Make additional payments toward those accounts if you can.
- Older information on your report has less of an impact on your score. This can be good and bad. If your positive information is old, then it won't help your score as much. If your negative information, is older it won't hurt your score as much.
- If you don't have any open credit products on your report, consider getting one. Depending on your score you could look into getting a secured credit card, gas or retail card, a loan with a cosigner, or possibly a bank or credit union card (if your score is good enough).
- Don't close credit products that have good information, and be sure not to open too many cards in a short amount of time.
References
- MyFICO. (n.d.). What's in my FICO scores. Retrieved June 12, 2015, from http://www.myfico.com/
Workplace Options. (Reviewed 2017). Credit: How to get it and how to improve it. (A. Moyer, Ed.). Raleigh, NC: Author.