With the challenges of the pandemic continuing to loom over us, many are wondering how their credit will be impacted. Some people have lost jobs or had wages cut. This snowballs into late payments on mortgages, car notes or credit cards.
Other people are trying to trim down a pocket full of charge cards but are concerned their credit may be hurt.
Conceptually, credit scores are pretty simple. It is a way of measuring how well you manage the size and timing of payments on debt and other obligations.
Credit scores are not only based upon your historical habits managing debt, but it also includes the type of accounts you have, the amount of credit available and your consistency of payments.
Whether you are trying to build credit for the first time, or repair your credit after hardship, here are some tips to consider.
Be patient. You will not create a great credit profile overnight. It takes years of consistently good habits.
Open a checking or savings account at a convenient bank or credit union. Remain faithful to keeping that account funded and active as long as possible. Show the ability to consistently deposit and withdraw funds without bouncing checks all over town. The ability to increase balances over time is a good sign.
Build good credit by having bank accounts, utilities, cellphones and other monthly payments in your name. If you are young and live with a roommate, putting the utilities or cable in your name may be an important first step.
Don’t borrow more than you can repay is just common sense. However, bankers, auto finance companies, credit cards and other installment loan providers seem to always aim to the high side in terms of what you are “pre-approved” for. Although this may allow you to rack up a ton of debt at the local car dealer or furniture store, it makes you subservient to those providers and decreases your financial flexibility going forward. Just because they offer you a large credit limit, take the time to think through what you truly need.
Improve your credit utilization. Credit utilization is one of the few aspects of a credit report that you can improve quickly. Credit utilization is calculated by dividing the total of your credit card balances by the total of all your credit card limits. You can improve your utilization quickly by paying down credit card balances. Increasing your overall credit limit can also help. However, you have to be disciplined enough to manage it wisely.
Manage your credit cards. If a bank will not issue a regular credit card, then request a secured one. A secured credit card has a low limit, i.e., $500 that is offset by a $500 deposit at the financial institution. This makes it very low risk for the issuing bank and you get to begin building credit.
With any charge accounts, you must make your payments on time. Missing a payment will count against you quickly.
If you can’t get a secured card, see if you can become an authorized user on a card. As such, see if you can be added to an existing account, but given your own card to use. The accounts positive and longer-term track record can be added to your credit report.
When using credit cards, strive for a happy medium. Don’t max out your cards and don’t merely make the minimum payments. Minimum payments convey weakness to a credit issuer. Convey that you can handle the opportunity and the obligation.
If you have managed to properly manage a credit card for at least a year, approach your card provider for an increased limit. Successfully managing a larger credit limit shows you can handle the increased limit while not abusing it.
Having many cards open at once can serve as a warning signal as it represents potential risk to lenders. Ironically, if you have several cards open and work to close them, this will also ding your credit. Don’t open more credit than you reasonably need. Otherwise, you can back yourself into a corner.
Lastly, pull your credit report once a year (AnnualCreditReport.com). Make sure accounts and remarks are accurately reflected. If not, clarify any discrepancies. Furthermore, utilities, cellphone payments, etc. may not automatically be added to your credit report. As such, contact the credit reporting agencies and request that these accounts and payments be added to your report.