There’s a three-digit number that has a big impact on your financial future: your credit score. A good credit score opens doors and empowers you to take out loans or open credit cards with more favorable rates. But a subpar credit score can make achieving some of your dreams, like getting that new-to-you- car for example, tougher than it should be.
Let's break down some of the best tips for building credit or rebuilding your credit if it's lower than you'd like.
The importance of credit & building credit
Your credit score, also called your FICO score, is a three-digit number that represents your overall creditworthiness. Think of it as an estimate of how responsible you are with managing your money or, more specifically, using other people’s money. When you borrow money – through loans or credit cards – and make payments on time, your score improves. The higher your credit score, the more likely institutions will be to trust you with larger credit lines or loans, usually at better interest rates. The reverse is also true. If you have no or a low credit score, you will be charged high interest rates or have lower limits. Check out our SavvyMoney online tool, available free to Sharonview members, to view your credit score, get access to helpful planning tools, and receive daily updates – features designed to help you reach your financial goals.
Credit scores are created by the three big credit bureaus: Experian, Equifax, and TransUnion. These credit bureaus take information from credit furnishers, like utility companies and lenders, and regularly update credit scores with new information. With an active financial profile, your credit score should be updated once per month.
But why is credit so important? Without a credit score, you won’t qualify for excellent loans for new cars, homes, and other expensive purchases throughout your life. A subpar credit report can also make it hard to qualify for certain jobs or lock you out of other important financial opportunities.
How long does it take to build credit?
How long it takes to build credit depends on:
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Whether you are just starting out
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How many credit sources you have (e.g., bank accounts, department store accounts, etc.)
If you’re building credit from nothing, you can begin building your credit score by opening a new credit account and using it regularly.
If you already have a credit profile but want to improve your score – say, it's at 500, and you want to bump it up by at least 100 points – expect to spend several months on that task. Remember, the credit bureaus only update credit scores once per month when they receive new information from credit furnishers. Even by doing everything right, you can only improve your standing with Experian, Equifax, and TransUnion so much per month.
That's why keeping your credit at a healthy level is always wiser than letting it fall and building it back up. There are even loans to help build credit. You can maintain your credit by consolidating debt and more! Remember to use credit-building strategies throughout your life, and your score will always be a benefit to your financial freedom instead of a detriment.
Ways to build credit
There are plenty of big and small ways to build credit up to a level that suits your needs and goals. If you want to raise your credit score as high as possible and qualify for top-notch loans with amazing interest rates, look at these tips.
1. Try a secured credit card
A secured credit card is an effective credit-building tool that works through collateral. In a nutshell, you make a cash deposit into a credit account with a financial institution. In exchange, the bank or credit union gives you a secured credit card that's backed by that cash deposit. You can then use the credit card as normal and pay down the balance; with each on-time payment, your credit score will grow.
Here’s an example of how this works:
Secured credit cards are phenomenal tools for rebuilding your credit score if it isn't very high or it's tough to get other credit cards with your current score. They prove that you can handle credit and make on-time payments, making it more likely you'll be approved for unsecured credit cards in the future.
2. Take out small loans, then pay them back
Starting out, you might qualify for loans in smaller amounts of $1,000 or less. If you do qualify for one, take it and pay it back as quickly as possible. This helps to establish a payment history and, if paid back in just a few payments, can reduce the amount of interest you have to pay. Doing this regularly will result in small but measurable improvements to your credit score. The purpose of these small loans isn’t really to get access to a lot of capital quickly; it’s to prove your creditworthiness to banks and other financial organizations.
3. Get a co-signer for larger loans
A co-signer is anyone who agrees to take on financial liability for a loan on behalf of a primary borrower. If you can get a co-signer to sign up for a personal loan on your behalf, you could get access to enough money for larger purchases. Just be sure to pay back the loan on time and in full to improve your credit score!
4. Always make timely payments
Of course, the most surefire way to improve your credit score is to pay off any current loan or credit card payments and bills on time. Try not to miss your payment due date by making late payments – each one dings your credit score and can harm your overall progress. Set up an automatically recurring payment to help with meeting the due dates.
5. Make minimum payments or more
By the same token, your payment amount needs to be at least equal to the minimum payment. It is better to pay more than the minimum if you can. If you are repaying a credit card, it will save you interest fees if you are able to pay the account in full each month. Making less-than-minimum payments won’t do you any favors in the eyes of the credit bureaus.
How to rebuild credit
If you have bad credit, all isn’t lost. In fact, you can build your score back up – even if it’s poor now! – with a bit of discipline, patience, and financial savvy.
6. Get a debt consolidation loan
A debt consolidation loan can be a helpful tool to improve your credit score if you have bad credit. In short, it’s a loan for the total amount of debt you have across all debt sources (like several smaller loans or credit card balances). You then pay off all those outstanding debts with the larger debt consolidation loan and only have one loan to pay off over time.
Debt consolidation loans are extremely helpful since they:
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Reduce the number of interest rates you have to think about to one
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Lower the lines of credit or loan accounts open in your name
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Make paying off your total debt much easier since you don’t have multiple loans to keep track of
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May reduce the interest rate for some of the loans you are paying off
7. Pay off small debts quickly
Your credit score is partially determined by your DTI or debt-to-income ratio. In other words, the more debts you have in your name relative to your total income, the lower your credit score will be.
So, if you don’t have great credit, it’s a good idea to pay off as many smaller debts as you can. For example, say you have three loans:
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A $500 loan
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A $1,000 loan
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A $2,500 loan
Instead of paying each back equally, make the minimum payments toward the two higher loan balances and pay off the $500 loan completely. That’ll improve your DTI ratio and eliminate a pesky interest rate at the same time.
Overall, these credit-building strategies are effective means to raise your credit score no matter how low it might currently be. Try to combine several of these tips together to turn your financial situation around and qualify for better loans and credit cards in a matter of months. You can also enroll in our SavvyMoney online tool to view your credit score with daily updates and get other financial tips.