To build your credit, you must find ways to prove how trustworthy you are when it comes to borrowing money and repaying it as agreed. As you do business with different creditors, many of them will report to three credit bureaus — Experian, TransUnion, and Equifax. These credit bureaus review your accounts to determine your credit score, and that score reflects how trustworthy you are. The better your credit score, the easier it will be to get a loan.
3 Ways to Establish Credit
There are many ways to establish credit. Here are three simple ways:
1. Share-Secured Loans — This type of loan is secured by the money in your credit union savings account until it is repaid. This is an easy way to help establish credit, and the interest rates are typically extremely low since you use your own money to secure it.
2. Credit Cards — Using a credit card for small purchases each month is a very common way to build credit. However, it’s important to learn how to properly manage credit cards to have the best impact on your score.
3. Student Loans — Any small loan can help boost your credit, but many of us have student loans anyway. This is a good way to build your credit if you stay on top of the payments and stay in communication with your student loan provider. I have seen student loans boost credit scores even if payments are not scheduled to be made. The key is to make sure that the accounts do not go into delinquency or default. They have several options to keep them in good standing, including income-based repayments, deferments options, forbearance, etc.
Factors that Determine Your Credit Score
Credit bureaus look at five elements to determine your credit score:
1. Pay History (35%) —This indicates how well you repay your debts. Having late payments can affect your credit score negatively. Late payments are reported as 30, 60, or 90 days late and are tracked on your credit report.
2. Credit Utilization (30%) — This is a measurement of how much of your credit limit you are actually using. To increase your score, keep your balance low, and never use more than 30% of your credit limit.
3. Length of Credit History (15%) — This factors in how long you have had a credit card or loan and what the average age is of your accounts.
4. New Credit (10%) — This is an evaluation of how many new credit accounts you have and how many new inquiries are showing.
5. Types of Credit Used (10%) — Retail accounts, installment loans, credit cards, and service accounts are all considered different categories. This factor looks in to how well you repay different types of credit.
As you can see, the pay history and credit utilization factors account for 65% of your credit score. So, the key to boosting your credit is to make sure you make your payments on time and DO NOT max out your credit cards.
By using this information, you will be able to build credit and keep improving your credit score.