We all start off with a zero credit score before utilizing credit, but building a healthy credit score is an important step in building your future. This article will outline the ways to do this responsibly and explain why a credit score is so important.
What is a Credit Score
A credit score is essentially your financial report card. The score tells lenders how responsible you are with your money. Do you pay your bills on time? Are you relying on credit for your expenses? Do you make your payments in full? A credit score is very important if you ever plan to buy a house, a car, rent a home, or even start a business.
Why are Credit Scores Important?
Most people are not able to save enough cash to reach these milestones, so credit allows us to make larger purchases and split up those payments over time with the help of a lender. Renting also utilizes your credit score because your landlord will want to make sure they can rely on you to pay your rent on time and in full every month.
Having bad credit could limit these opportunities for you in the future, or cost you a lot more to obtain them.
Ways to Build Credit from Scratch
In order to build credit, you actually have to use credit. This can be tricky because without an established credit history it is often difficult to open a credit card account or qualify for a loan. Below are some ways to begin building your credit from the ground up.
Establish Credit with the Credit Bureaus
There are three major credit bureaus that U.S. lenders and businesses rely on for reporting on and checking consumers’ credit history; Equifax, Experian, and TransUnion. As the consumer, you are also able to check your credit score and credit report from these credit bureaus. It’s important to check your report at least annually, not only so that you know where you stand, but to catch any potential errors or even identity theft.
To obtain your current credit score, you can check annualcreditreport.com. Through this website a consumer can obtain free copies of their credit report three times a year, one from each credit bureau.
Apply for a Secured Credit Card with HFS
A secured credit card is a credit card program where your credit limit is determined and backed by your own money. A secured credit card is easier to qualify for because you are using your own money as collateral. For example, a secured credit card with a $500 limit would require you to have $500 set aside. This money is “frozen” in your savings account for as long as the credit card account is open and unavailable for use. You can secure an HFS Visa Platinum® Credit Card or open one of our secured loans, which work similarly.
Become an Authorized User on a Credit Card
Becoming an authorized user on a credit card account is when the owner of the credit card authorizes you to also use their credit card account. You get your own separate card and the card gets reported on your credit report, which impacts your credit score.
Part of what determines your credit score includes the length of credit history. If you are an authorized user on an account that has been open for a while, that can also positively impact your score. Remember, this does impact your credit score so make sure the person who owns the credit card account is responsible and paying their bill on time each month.
Consider a Credit-Builder Loan
Generally speaking, it’s never a great idea to take on debt (a loan) only for the sake of your credit score. However, in some cases it may be necessary. Unlike credit cards, loans will only help you build good credit history if you pay them on time and your full payment every month. When taking on a loan to build credit, make sure not to take on too high of a balance, and be sure that the monthly payment for the loan is within your budget. When considering a Credit-Builder Loan, it would be best to speak to a Loan Officer to discuss your options.
Maintain a Low Credit Card Balance
Another important factor contributing to your credit score is your credit utilization. This is the amount of available credit you have tied up in debt. It is recommended to never use more than 30-50% of your total available credit. Using more than that could negatively impact your score.
Make Payments on Time
One of the most important things you can do to build good credit is to always make timely payments. A large portion of your score is determined by this. Not only should your loan and credit card payments be made on time, but this also includes utility bills, cell phone bills, etc. because non-payment on accounts like that can be reported to the credit bureaus.
Apply for a Credit Card with HFS Federal Credit Union
Need to get started on building your credit? Apply for an HFS Credit Card today! Apply online or give us a call at (808) 930-1400 or toll-free at (800) 216-2666 to speak to a Loan Officer.