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Build Your Financial Future with Good Credit Habits

I’m sure you’ve heard about the importance of good credit, whether from a friend, financial advisor, or even on the evening news, but why? You might ask yourself, “How can going into debt make my finances better?” or “I only need good credit if I want to buy a house, right?” or “If I just pay cash, there’s no reason for me to build my credit…” or is there?

Get to know your FICO

The best way to figure out how to get where you’re going is to know where you are right now, and that begins with knowing what’s on (or what’s not on) your credit report. The credit score most commonly referred to is the FICO, which stands for “Fair Isaac Corporation.” Lenders use that number to determine whether or not to make you a loan, and if so, at what rate. The higher your score, typically, the less interest you will pay when you need to borrow money. The median credit score is close to 725, and to qualify for the best rates, you want to get your credit score to a 760 or higher. If your score is below 640, it may be difficult for you to obtain a loan or other services, and if you do, you will pay more.

Even if you’ve always paid cash and haven’t needed a loan, more and more companies (besides just lenders) have started to use FICO scores to gauge risk. Landlords, insurance companies, utility companies, and even potential employers will often look at your credit to determine if you are creditworthy, trustworthy, or even hirable. You may be denied a job or have to pay higher insurance premium, deductible, or deposit. Even if you do not need a loan, you probably need a job and a place to live. Your credit history matters.

Where to start

Hopefully, you’re convinced that you need to keep an eye on your credit history, learn how to build it and get your score as high as possible, but how do you do that? Start by looking at your report to see what’s there and make sure it’s all correct. The best place to do that is by going to www.annualcreditreport.com and checking your credit history with each of the major credit bureaus, Experian, Equifax, and Trans Union. It’s better to fix any errors or be aware of any issues before you try to apply for a loan, because sometimes it can take 60-90 days or even more to get inaccuracies corrected. Make sure to look at each one of the three bureaus’ reports, because they’re not always the same.

What if I don’t have any history?

If you don’t have credit history, don’t worry. There are ways to get established and build a solid credit foundation. Your FICO score is based on the following factors weighted in these percentages:

  • Payment history (35%) – Do you pay things on time?
  • Outstanding balances (30%) – Are your credit cards maxed out?
  • Length of credit history (15%) – When did you start using credit?
  • New credit (10%) – Are you taking on too much too quickly?
  • Types of credit (10%) – Do you have experience with different types of credit?
  •  

    Even though the length of your credit history and how long you’ve had an account established are part of the score, most of your FICO is comprised of your payment and balance habits. If you start small and make sure to pay on time, you will be well on your way. Keep the balance owed on any credit card as small as you can, as your first credit limit will likely be small as well.

    What else can I do?

    Think about any bills that you pay now, even if they don’t show up on your credit report. Do you pay rent? Utility or cell phone bills? A payday lender? A furniture or appliance lease? A gym membership? These things can help you prove to a lender that you have the ability to pay on time. How you manage your checking account can also be a form of alternative credit that a lender can use.

    Another thing you can do is look at a share-secured loan or a credit-builder loan. Fitzsimons offers both of these products. A share-secured loan is a loan you take out against your own money in your account. A hold is placed on those funds until the loan is repaid. A credit-builder loan is similar, but it’s a bit easier to get since you do not need to have funds on deposit. However, you won’t have access to the money you borrow until after you’ve paid it back. Both of these loan types will show up on your credit report and help you build history.

    I have bad credit, it is too late?

    No, it’s never too late to turn things around. Your credit score is a “snapshot” in time and it changes with every update to your credit history, both good and bad. If you’ve had some blemishes on your credit history, start paying on time now, and get your balances down on any revolving accounts like credit cards. Past credit problems affect your score less as time passes, so building a good track record from here on out will help heal the damage that’s been done. A credit builder loan (see above) might be another good idea to show a lender that you’re back on track and able to manage your debts.

    I’m still overwhelmed. Where can I turn?

    At Fitzsimons Credit Union, we’re here to guide you towards a better financial future. Here are a couple of additional steps you can take: Stop by either of our branches and talk with a loan officer or branch manager. We can go over your credit history with you and give you specific tips to help you improve your score.

     




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