Building your credit is necessary, but it takes time. Still, you can do multiple things to start creating your credit history, such as applying for a loan or credit card.
But why is building your credit so important? Your credit history and credit score explain your financial habits to banks and other lenders and indicate whether they should do business with you. A credit history that reflects responsible fiscal behavior and a high credit score will open more doors for you now and in the future.
Credit scores range between 300 and 850 and fall into five categories: poor, fair, good, very good, or excellent.
In this article, we'll discuss how to build a healthy credit score – with or without a credit card – and common mistakes to avoid, too.
Why should you worry about credit?
Good credit is beneficial because it helps you achieve major financial goals – like buying a new home or car – with less hassle. Building and maintaining good credit can open many doors financially.
One: You'll pay lower interest rates on credit cards. Better credit gives you access to lower monthly fees, which, in turn, saves you money.
Two: Lenders will approve you for loans and credit cards faster. A good credit score doesn't automatically guarantee approval, but it's a significant contributing factor.
Three: You'll have more negotiating power with potential lenders.
Four: You'll have access to better car insurance rates. Insurance companies offer you coverage depending on your credit reports. The higher your score, the less you'll pay, and the fewer penalties you'll face since they won't consider you a risk.
How does credit work?
There are three main types of credit.
The first is revolving credit. Revolving credit means you have a set credit limit of how much money you can borrow, which you pay back before you can access that credit again. Credit cards are a typical example of revolving credit.
The second is installment credit, which refers to money that you borrow and repay in fixed installments, usually monthly. Examples include student loans, personal loans, and car and mortgage payments.
The third type of credit is service credit, which refers to anyone who provides you with a service you pay for, such as utility bills.
How to build credit
There are two main approaches to establishing and improving credit, either with or without a credit card. Read on to learn more about both.
Building credit with a credit card
One: Request a higher credit limit from the credit card company. Exceeding your predetermined credit limit will result in penalties. Asking for a higher limit will help you avoid overspending.
Two: Use a secured credit card. Doing so is one of the best ways to build credit, especially if you’re a beginner. A secured card means that you pay a deposit up front before receiving the actual card.
Three: Keep your credit card accounts open. If you cancel a credit card, you will lose any credit history associated with that card, and your score will suffer.
Building credit without a credit card
One: Paying your bills on time is one of the simplest ways to boost your credit. Payment history is one of the biggest factors that affects your score, so by adhering to due dates, your punctuality will show up in your file as responsible behavior, and banks will be more likely to trust you.
Two: Promptly address any errors regarding your credit score. You’re allowed to request a free credit report annually from the three major credit bureaus: Equifax, Experian, and TransUnion. Being proactive will enable you to flag and fix any mistakes as soon as possible. Remember, alterations to your credit can take time, so the sooner you make them, the better.
Three: Apply for a loan. One of the most useful methods for building credit is taking out a loan, specifically a student loan. Most people have one, if not several, thanks to the high costs of university education. Student loans typically don't require a credit check, but they are a part of your history.
Building credit from scratch
If you haven't established credit history, you still have several options to build it from scratch. You can apply for a credit card or a loan, and you can take extra care to make payments on time. Adding alternative data to your credit profile – such as your rent, utilities, and cellphone payment history – provides banks and lenders with a more detailed picture of who you are in terms of finances.
Lastly, paying off your debt as soon as possible results in a considerable improvement to your credit score as well.
4 things to do when building credit
One: Maintain a budget.
Two: Responsibly apply for credit cards. Specifically, avoid applying for multiple cards in a short period. This can suggest financial desperation.
Three: Make credit card and loan payments on time or early.
Four: Think of bankruptcy as a last resort. Filing for bankruptcy is an extreme measure, albeit sometimes necessary. Still, it can severely hurt your credit score. Seeking help from a professional to find an alternative is the best route to take to avoid this.
So, you have good credit, and you want to keep it that way. An effective tool to help you do so is Point Card. Not only does Point Card offer you a means to handle your money and your credit accounts in a way that works for you, but as a Point cardholder, you are also entitled to multiple perks, including fraud protection, no interest rates, and cash-back on all purchases. You also get bonus cash-back on subscriptions, food delivery, and rideshare services, plus rental car and phone insurance, and more.
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