Establishing and maintaining a healthy credit score is essential for financial well-being in various aspects. However, you would face challenges when starting your credit journey due to the contradiction of needing credit to build credit. According to Experian, the average FICO credit score for Americans was 716 in 2021 whereas starting with tools like secured cards can help build scores over time.
Secured credit cards can help build credit through responsible usage where an individual deposits money upfront as collateral. Secured cards essentially allow the building of credit history while eliminating risk for the issuer.
In this article, let us explore some directions on how to build and maintain a healthy credit score.
What is a credit score?
A credit score is a numerical value that is determined based on credit history, which involves various aspects like on-time bill payments, low-credit utilization, etc. While secured cards have some specialized loans and products that aim to help build credit. Thus, credit-builder loans function by placing loan funds into a locked savings account as collateral.
Making payments allows the release of funds and establishes a positive payment history. There are credit-building tools that provide lines of credit to be repaid in fixed installments over time. 11 percent of Americans do not qualify for a FICO score, and products explicitly designed to build credit are hugely beneficial. Even if you have a very less credit score there are certain places where you can get loans in Canada for bad credit.
6 Tips for Building and Maintaining a Healthy Credit Score
Keeping Credit Utilization Low
One of the indispensable ways to maintain a healthy credit score is to maintain credit utilization as low. Making at least the minimum payments on time every month is essential. Credit utilization below 30 percent is recommended. Cautious credit application practices also help, as too many hard inquiries when applying for multiple new accounts can lower scores temporarily. Finally, avoid closing old credit card accounts, as a longer credit history boosts scores.
Have a Cosigner
The co-signer assumes shared responsibility. Having a co-signer with good credit can accelerate building credit. Being added as an authorized user to someone else’s credit card account can also be helpful. However, authorized users have no financial responsibility unless they make charges to the account. While being an authorized user can build a credit history, it’s essential that the primary user makes timely payments and has a solid history.
Monitoring Regularly
Monitoring credit scores and reports frequently enables individuals to catch errors early, analyze score factors, and build responsible habits. While the road to good credit takes diligence and time, tools and techniques like secured cards, credit-builder products, co-signers, rent-reporting, and responsible practices will lead to success. By understanding the nuances of credit scores, anyone can build and maintain healthy credit.
Regular Bill Payment
Some regular bill payments like rent can also build credit if reported. Rent-reporting services will include monthly rent payments on credit reports.
While services like Experian Boost allow self-reporting of utility and streaming service payments, their impact is minor compared to services directly reporting rent. With 54 percent of adults never checking their credit scores, monitoring rent and utility reporting services can ensure these payments work toward better credit.
Avoid Closing Old Credit Card Accounts
Closing old credit card accounts sounds disciplined but do not close old credit card accounts unless necessary. If closing is unavoidable, shift balances to a different card first. Monitoring credit scores and reports frequently enables individuals to analyze score factors, catch errors early, and build responsible habits.
Make Minimal Payment Regularly
Making at least the minimum payments on time every month is essential – payment history accounts for 35% of FICO scores. Also, experts recommend keeping utilization below 30%. Applying for new credit only when needed is also wise. Too many hard inquiries when applying for multiple new accounts within a short period can lower scores.
Building Credit is Challenging?
- Building credit poses a frustrating paradox: needing an existing credit history to get approved for new credit. According to the Consumer Financial Protection Bureau (CFPB), approximately 26 million adults (one out of 10) are considered “credit invisible,” with no credit history whatsoever. Additionally, around 19 million adults lack a credit score altogether due to minimal credit usage or an outdated credit history that no longer appears on their reports.
- Individuals with poor or no credit history struggle to get approved for credit products that could help build their scores. Credit invisibility also correlates strongly with low income. Without verifiable credit, low-income individuals face obstacles to accessing employment, housing, insurance, and more.
- Establishing a responsible repayment history is crucial but difficult without starter credit options. Missed payments or delinquent accounts can quickly damage scores, especially for those with minimal other credit histories.
Wrapping Up
In addition to secured cards, some specialized loans and products aim to help build credit—credit-builder loans function by placing loan funds into a locked savings account as collateral. Making payments allows the release of funds and establishes a positive payment history.
Frequently Asked Questions (FAQ)
- Why is it difficult to get credit without a credit history?
The challenge lies in the paradox of needing credit to build credit. Lenders often look for a responsible repayment history, which can be hard to establish without prior credit.
- How long does it take to transition from a secured to an unsecured credit card?
The transition depends on various factors like timely payments and overall credit behavior. With consistent and responsible use, individuals can typically transition within a year or so.
- Are there any downsides to being added as an authorized user to someone else’s card?
While being an authorized user can build a credit history, the primary cardholder must have a solid payment history. Any negative behaviors like late payments also affect the authorized user’s credit report.
- How does a co-signer help in maintaining a high credit score?
The co-signer assumes shared responsibility. Having a co-signer with good credit can accelerate building credit. Being added as an authorized user to someone else’s credit card account can also be helpful. However, authorized users have no financial responsibility unless they make charges to the account. While being an authorized user can build a credit history, it’s essential that the primary user makes timely payments and has a solid history
