How to Build Credit in 6 Simple Steps
Whether you're new to the world of finances and need to learn how to build credit without a credit history, or you’ve made some mistakes and are dealing with a low credit score, you may find yourself wondering how to increase your credit score. There are six steps you can take to learn how to build your credit and create a healthy financial foundation for yourself. By following these, you can enjoy the benefits of a credit-worthy score both now and in the future.
1. Check Your Credit Report Regularly
It can be frightening to check your credit report when you know you're struggling with poor credit, but you can't fix what you don't know is broken. The first step in learning how to build credit is getting into the habit of checking your report regularly. Take swift action against any problems that you find on the report. If you see mistakes or accounts you don't recognize, take the time to fix them. Making it a regular habit to check your credit report will help you stay on track to take your credit rebuilding seriously. You will be able to see what actions are helping and what actions are hurting, but only if you check the report with consistency. Check your credit report for free every twelve months at www.annualcreditreport.com.
2. Open the Right Checking Account and Credit Card
Your checking account and your credit cards can be important tools in helping you build or rebuild credit. If you need access to a checking account but have had some difficulty in the past managing a checking account, a second chance checking account may be the perfect solution.
A second chance checking account gives you the convenience of a checking account despite your past banking mistakes. It also allows you to start building a positive banking history again. After using the second chance checking account for a period of time, you will have the option to upgrade to a regular account. America’s Credit Union offers our Flexible Checking Account as a great second chance checking option to help you get a fresh start.
Often when young people are starting out on their own, or if someone hasn’t had many major credit purchases in their lifetime, they may find that their credit score is lacking. If you are looking to build credit, consider applying for a low-interest credit card. With a credit card in hand, you can make a few small purchases each month, and then pay them off in full every billing cycle. This will help you build your credit history and reliable payment history. America’s Credit Union offers two great credit card options allowing you to find the low rate credit card you need to rebuild your credit with small manageable steps.
3. Build Credit by Striving Never to Miss a Payment Again
One of the most important things you can do to build your credit is to commit to never missing a payment again. Missed payments have a huge impact on your credit history and score, so make sure you're paying on time, every time.
One of the easiest ways to ensure this is to set up automatic payments with all of your creditors. Automatic payments mean the bill gets paid and you don't have to think about it. This makes it nearly impossible to miss a payment. This will help your credit score because your repayment history is responsible for 35 percent of your score.
To discover how to build or improve your credit score, download our free guide:
4. Start Your Rainy Day Fund to Help Build Credit
A savings account is another tool that can help you in the process of building credit. A rainy-day fund is a fund you use for emergencies only. You will set aside a few thousand dollars in this account and use that when you face a sudden emergency car repair, appliance replacement, or similar cost.
So how does this help you build credit? These types of emergencies are inevitable as you go about your life. Having a rainy-day fund means you can cover these emergencies without adding another unexpected charge to your credit card balance. Keeping your credit card spending minimal is going to push your credit score higher. This is commonly known as “credit utilization;” 30 percent of your credit score is determined by how much debt you have in comparison to how much capacity remains unused.
If you are looking for a way to jumpstart your savings, review our 52 week savings challenge blog to save an extra $1,378 in just 12 months.
5. Use a Savings Secured Loan to Build Credit
Sometimes the problem isn't past repayment issues, but rather a lack of credit history. In order to borrow money, you have to have some credit history, but if you've never had a credit card or loan such as a car loan or personal loan, it can be hard to get. Savings secured loans, or credit builder loans can help in this scenario.
Savings secured loans do not require a good credit history. The lender will typically hold the amount you borrow in a bank account as collateral. Funds can usually be from a savings account or certificate of deposit. Once you receive the loan, you will start making payments. Those payments will get reported to the credit bureaus. When you have repaid the loan in its entirety, you will get your initial money back. The lender takes on very little risk because they never release the funds to you until the loan is repaid, but you get to add a positive repayment history to your credit report.
6. Pay Down Balances and Use Credit Cards Sparingly
One of the best ways to rebuild your credit is to pay down your credit card balances. To do this, you need to start paying more than just the minimum. With the minimum payment only, it can take many years to pay off balances and get ahead with your credit.
To pay down your credit card balances, start with the one with the smallest balance. Pay down as much of that as possible each month until it is repaid, and only pay the minimum on your other cards. Once the smallest balance is paid off, take the amount you were paying towards that and add it to the minimum for the card with the next smallest balance. Continue rolling these balances until you have paid off everything.
In order to make this debt repayment plan work, and to continue building your credit, use your credit cards sparingly, pay them down, and watch as your credit score continues to rise.
Learning how to build credit is not difficult, but it does take time and dedication. With the right mindset and tools, you can rebuild your credit, or learn how to build credit from the ground up and put yourself in a better financial position. Make the decision now to start these six steps and enjoy the benefit that a healthy credit rating brings.
If your credit score has been damaged by past errors or mistakes and you are unsure where to turn, contact America’s Credit Union today. Our Savings Secured Loan and low rate credit card options can help you build your credit score and our Flexible Checking Account can help get you back on your feet. Our Contact Center Representatives are also available to help.
Membership in America’s Credit Union is open to anyone who lives or works in Dallas, Rockwall or Collin Counties, Texas, and their family members. Employees of select employers may also be eligible. See our Membership page for details.