How to Build Credit and Create More Financial Opportunities

No matter your feelings on using credit, one thing continues to be true: credit scores can help us access new financial opportunities. With a positive credit history, you can be approved for more products and services, ultimately impacting everyday life. The good news? Even if you don't have much credit built up yet, or want to improve your score, there are ways to begin boosting your score. In this article, we'll be focusing on the importance of prioritizing your credit health, as well as how to build credit.

The Role of Credit in Financial Health

So, what exactly does your credit score say about your financial well-being? Simply put, it's a way to demonstrate how trustworthy you are when borrowing money. Lenders will look at systems like your FICO score to assess their risk level in letting you borrow from them. When you want a mortgage loan, an auto loan, or a credit card, they'll check your credit score before making lending decisions. 

When your score is higher, it shows that you're more likely to pay your debts on time. This means better approval odds, lower interest rates, and higher credit limits will likely be offered to you, saving you significant money in the long run.

Factors that Affect Your Credit

If you're wondering what's affecting your credit score the most, it's important to consider a few key factors. Your score is determined by a combination of the following:

• Payment History: The factor with the greatest impact is your payment history. Every time you pay back what you owe on a credit card or loan, it gets sent to the credit bureaus and helps establish a positive payment history. At the same time, missing a single payment can hurt your score.
• Credit Utilization: Credit utilization, or credit usage rate, means the amount you owe compared to your credit limit. Credit experts often advise keeping a low credit utilization rate – below 30% for a good score, and ideally below 10% to show lenders you're handling your credit responsibly.
• Length of Credit History: The longer you've been managing your credit, the more proven experience you have. For that reason, only having credit for a short period of time could lead to a lower score.
• Credit Mix: Credit mix includes things like credit cards, lines of credit, and loans you pay back over time. A diverse mix shows that you know how to manage various types of credit well, which can look better to lenders.
• New Credit: When hard inquiries show up on your account, meaning lenders are processing a new credit application, you may see a drop in your score.

By staying mindful of your credit accounts and how you're managing your funds, you can use each of these categories to your advantage.

Steps to Build or Improve Your Credit

For people beginning their credit journey, building credit might feel like an uphill battle. However, you can follow easy steps to start creating a good credit history. A helpful first step is to ask for a free copy of your credit report. This will help you understand your current credit standing. Then, you can start small and begin working toward consistent growth. Now, let's explore the steps you can take to see an improvement in your score.

Use Credit Cards Wisely

Choosing the right credit card is important for building your credit. With many options out there, you need to pick a card that fits your finances and spending habits. If you’re new to credit or have a short credit history, a secured credit card is a great place to start. These cards usually require a security deposit, which adds a layer of protection for card issuers. This type of first-time credit card to build credit will also have lower limits, designed to help you spend responsibly from the beginning.

As you create a good payment history and show that you can manage credit well, you can look into other cards with better terms and rewards. However, it's not always a good idea to have too many cards open. With too many credit card balances and payments to keep track of, it can become harder to stay on track. To help, you can set up reminders or use autopay to cover at least the minimum amount. This helps you avoid late fees and credit card debt while protecting your score.

Act as an Authorized User

Becoming an authorized user of a solid credit card account held by someone with good credit can help you improve your credit score. As an authorized user, you can use the credit card and benefit from the positive payment history. Plus, you're not legally required to pay back the debt.

However, it's important to know that being an authorized user does not guarantee that you will build good credit. Still, it can help you achieve a good credit score. It adds a positive payment history to your credit report, improves your credit utilization ratio, and makes your credit mix more varied.

Before you become an authorized user, talk openly with the main cardholder. Discuss their spending habits and how they handle payments, ensuring their financial choices match your goals for building credit. This will help you have a better chance of getting approved for more lines of credit in the future.

Explore Credit Builder Loans

Credit builder loans are a good way to build or improve your credit. They help show that you can borrow and pay back responsibly. Unlike traditional installment loans, where you get the money right away, with a credit-builder loan, the lender keeps the loan amount in a savings account. You make regular payments for a set time, usually six to 24 months. After you finish making all the payments, you get the money back.

The best part is that every payment you make gets sent to the credit bureaus, contributing to a positive history. Credit builder loans are great if you are new to credit or if credit has been a challenge in the past. They show you're serious about managing your money well.

Keep in mind that credit builder loans aren’t a fast fix or a way to combine debts – they're a tool to help you create a good track record of on-time payments.

Report Rent and Utility Payments

While rent and utility payments don't usually affect credit scores, they can be used to your advantage. With changes from the Consumer Financial Protection Bureau (CFPB), paying rent and utilities on time can be seen as a sign of good money management. 

To do this, you should choose a service that reports eligible rent payments to the credit bureaus, Experian, Equifax, and TransUnion. This will help you get the most benefit for your credit file and is especially helpful for those who do not have much credit experience. 

Unlock Opportunities with Better Credit

Improving your credit can help you create the future you want. When you work to improve your credit score and keep a solid payment history, you can increase your chances of getting loans, credit cards, and other financial options. As you're building your credit, remember to start with a free credit report, and then begin exploring products and services that can help you add to a positive credit profile. At Leaders, we're proud to offer low-rate credit card options that can help you begin your journey.

As you're working to decide the best path for your finances, we encourage you to check out our free resource: Which Credit Card Option is Right for You? We help walk you through each type of credit card, and what you should consider while weighing your options. Get ready to handle your money with more confidence! 

Leaders Credit Union is federally insured by the NCUA.