Establishing or Rebuilding Credit

The most important thing to know about building your credit is that it takes time. There are no instant solutions. As a matter of fact, if you see a get-there-quick plan to improve your credit, it may be at best an unproven technique that is likely to backfire on your finances. At worst, it could be a scam.

But that doesn’t mean establishing or rebuilding credit has to be complicated. In fact, the best news about credit is, there is a clear path forward – not always easy or fast, but reliable and consistent. If you stay on course to building good credit, you will eventually succeed.

First, let’s talk about building credit from the ground up.

Establishing Your First Credit

Many have experienced the frustration that comes with building your first credit. The common lament is: I need some credit history to get a good credit card. But, I need a credit card to get good credit history.

There’s some truth to that statement, but there’s more to it. Good credit comes from the complete picture of your financial history, past and present. One of the most common ways to establish credit without a traditional credit card is through what’s known as a secured card.

Secured credit cards are like standard credit cards, but the limit is determined by a required security deposit in a special account. For example, if your security deposit is $500 in the account, your credit limit will be up to $500. Many secured cards won’t require you to have established credit history, and many will also be noted by credit bureaus so that the card is part of your credit report.

Rebuilding Credit and Understanding Your Score

Once your credit is first established, you may later find that your credit score is not as high as you need it to be. Regardless of your previous credit history, there is usually a way to raise your credit score. Two of the key elements of your finances to keep in mind:

  • Bank accounts – it’s a basic principle of credit, but many people don’t realize it. Your credit score is determined based on many factors, two of which may include the types of financial accounts you have and how you maintain them. Credit Cards, other loans and even deposit accounts may all affect your credit score. Credit bureaus want to see that you have a positive relationship with financial institutions, so checking and savings accounts that are not overdrawn and have positive balances may go a long way. Bank accounts may be reviewed when determining your overall score.

  • Rental history and utilities – credit bureaus may penalize you for bills you don’t pay. The most important takeaway when it comes to rent and utility bills is to pay on-time, whenever a bill is due; otherwise, your credit score may be affected.

Credit Pitfalls

Generally speaking, keeping a good financial history and paying your bills and other debt are the basic principles to good credit. But there are also behaviors that can impact your credit score negatively. A couple of common mistakes to avoid:

  • Don’t open several cards at once – it may be tempting to open multiple cards so that your overall available credit increases, but obtaining several cards at once may reflect poorly on your credit report.

  • Don’t close unused credit cards – even if it seems logical to close that one card you opened last year that you don’t want anymore, leave the card open. Sometimes it’s alright to close a credit line – but be thoughtful about opening and closing cards, and do it sparingly. Remember that a closed account still appears on your credit report.

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