As we close out 2024 and move into a new year, many of us will set resolutions. One to consider might be to improve your credit score.
Your credit score can determine whether you can get a loan or a mortgage, how much you can borrow, and what interest rate you will pay. Credit scores are built from your credit history, and financial institutions use them to determine whether you are a good risk. They decide, based on your credit history, how much you can afford to borrow for a car or house. Employers might run a background check that includes your credit history to determine whether to hire you. Landlords do the same for potential renters.
Building good credit takes time. The first and most important step is to know and understand what is in your credit report. You can request your credit report from each of the three nationwide credit reporting companies, Experian, Transunion, and Equifax, once every 12 months free of charge at annualcreditreport.com.
If you see anything wrong on your credit report, you should take steps to correct those issues. You might find that you are a victim of identity theft. Perhaps a business has you confused with someone with the same name. Contact the credit bureau in writing, explain the problem, and ask for an investigation. Then they should correct anything that is inaccurate. You might need to put a security freeze on your credit if you think someone is using your information illegally.
If you have been denied a loan or a credit card, you should ask why you were rejected. The business is required to tell you how they reached their decision. That is a good time to review your credit report!
How to you build good credit and raise your credit score? The most important step in building good credit is to pay your credit card bills and loan payments on time! Remember, the financial institution that loaned you money or gave you credit wants to know they’ll get their money back.
Credit cards have credit limits, and you don’t want get too close to that credit limit. Credit scoring models look at how close you are to being “maxed out.” People who use too much of their available credit may have trouble with repayment. Experts advise that you should not use more than 30% of your total credit limit if you want to raise your credit score. And remember that the only way to get ahead with a credit card is to pay your bill in full every month.
Credit scores may also decline if you apply for and open too many credit accounts in a short time. Financial institutions may worry that you will be overextended, and that may lead to bankruptcy.
Not everyone who is denied credit has a bad credit history. Having no credit history also means it will be hard to get a loan. In fact, the Consumer Financial Protection Bureau says that one in ten adults experience credit invisibility, which means that they don’t have a credit history report with the three major credit bureaus. Or they might have “thin” credit, not enough credit history to generate a credit score.
Where can a person start to build credit? Consider getting a prepaid or secured credit card, but be sure to ask whether your payment history will be reported to credit bureaus. For these cards, you have to deposit money with the bank, beginning with the full amount you want to be able to access. Realize that they will probably charge an application fee and a high interest rate for unpaid balances, even though it’s your money. After you have established a pattern of paying on time, you can move to a regular credit card. It may be a while before you can get enough credit history to have a “no fee” card.
Retail chains and gas stations offer credit cards with lower credit limits that are usually easier to obtain. Credit unions and some banks offer small loans to young people who are trying to establish credit. Financial institutions will happily loan to people with cosigners, relying on that cosigner’s credit score and reporting on both credit histories whether payments were made on time. But remember that the cosigner is liable if payments are not made.
I’ve noticed in the last few months that my credit cards are asking if I want to add authorized users to my accounts, which would mean that my payments on those cards would also be reported to help establish their credit histories. Again, I would be responsible for paying any charges they might make.
Building a good credit history takes time and planning. People who will be making major, expensive purchases in the future can save a lot of money in interest payments based on a good credit score, so it is worth the effort.