Building Good Credit is one of those things many people don’t understand. It’s a subject commonly avoided, like asking someone their salary or how much they pay in taxes. There are many reasons for this, from the negative feelings people have towards credit and debt as well as just not understanding how the process works. Honestly though, building good credit is something anyone can do with a little understanding and discipline. These tips can help you go from No Credit (or bad Credit) to Good Credit Fast!

Why does a Good Credit Score Matter?

Why should you take the time to understand how to boost your Credit Score? Well, a Good Credit Score is important because it’s what banks and institutions use to determine whether or not they trust you. Basically as you want take out debt, whether it be credit cards or student loans, the banks want to know whether you make your payments on time, in full amounts, how much debt you have and so on before they give you more debt. This is what a Credit Score does. It is essentially a measure of your debt trustworthiness as reported by the three major credit bureaus. So, let’s say you want to buy a car or a house and you need a loan, the lender will check your credit score to see if you’re safe to give a loan to. Also, the safer you are, the lower your interest rate. That’s right, a Good Credit Score = Lower Interest Rate. That means you can save more on interest just by keeping up with your payments. Now if you searched to find this post, you probably already know how important Good Credit can be, but it you want to learn more how your Credit Score is calculated, just click this link; Credit Score Calculation.

Step 1) Check your Free Credit Report

DO NOT PAY FOR YOUR CREDIT REPORT!!!! I want to make sure to say this right upfront, there is no reason to pay for your credit report. You can get your credit report for free from annualcreditreport.com at least once a year so there is no need to pay for a credit report. Other sites can also offer free credit reports, and so do the credit bureaus but you should avoid paying for your credit report since you don’t need to.

Now, you want to check your credit report because this will tell you, in depth, what is going on with your credit history. Why you might have no Credit or Bad Credit should all be explained right here. Once you’ve received your Free Credit Report, you want to look and see what issues may be affecting your score. Common issues include;

• Not Enough Credit or Very Short Credit History

• Frequent Late Payments

• High Credit Balances

• Reporting Inaccuracies

Now these issues will need to be addressed, and many will in the following steps. The ones you need to handle immediately though are Reporting Inaccuracies. If you’re seeing credit cards being opened and maxed that you didn’t open, someone has likely stolen your identity and you need to report the fraud to the credit agencies immediately. It can take 6 months for fraud to be investigated and removed. Even if the case is simply that the bank or consumer agency just failed to report a timely payment, you will want to inform the credit bureaus and the Consumer Agency of the error because it’s removal will boost your score Instantly! You want your score to be as accurate as possible.

Step 2) Get added as an Authorized User

Now that you’ve checked our credit report, let’s say we find out that you simple don’t have enough Credit or Payment History. Payment History makes up 35% of your Credit Score and Length of Credit History another 15%. That means about 50% of your credit score has to do with how long you’ve been paying down debt. One thing you can do to boost your credit score is to have a responsible Credit User add you as an Authorized User. Essentially, an Authorized User is someone granted the use of an existing credit card owned by someone else. The Authorized User get there very own credit card but the Owner of the card is ultimately responsible for the card.

How does this help you? When the Authorized User or the Owner spends money with that credit card and pays off the balance, the bank reports the payments to the Credit Agency on behalf of Both Users. That means you have a safe way to start building credit if you’re starting from 0. Some banks even transfer the owner’s history to the Authorized User, although very few banks actually do this. Also, depending on how much available credit the owner has, this can help promote your credit utilization because now you’ll have more available credit you aren’t using. Of course, this doesn’t work for you if you can’t find a RESPONSIBLE Credit User. Just like good credit history will go towards your credit, so will bad credit history. You don’t want to be added to a card where someone constantly maxes the card and never pays it off. Those failed payments will also be reported for your credit score. The same is true if you add someone to your card. Never add someone you don’t fully trust to be responsible with the card.

Step 3) Open a Secured Credit Card

If you aren’t able to be added as an authorized user, or even if you were, you’re next step should be to open up a Secured Credit Card. A Secured Credit Card is just like a regular credit card but it is backed by a cash deposit. Depending on the Secured Card, it might be backed by a Certificate of Deposit (CD) Savings account or even your checking account in some cases, but what happens is your available credit is equal to the cash amount backing your card. So, let’s say you open a Secured Card that requires a $1,000 deposit. Once you deposit that $1,000 into the CD Account with the bank, you will now have a $1,000 Credit Limit added to your card.

So, you use the credit card and, as long as you’re making the payments on time, you’re building Good Credit. However, if you get to a point where you can’t make the payments, the Credit Card is protected because the bank has the deposit in savings ready to pay off the card so it won’t ruin your credit. Of course, you want to avoid that as much as possible.
These cards are great for people with no or bad credit because you don’t need a high Credit Score to qualify. Since the bank knows the credit is protected, the bank can feel safer giving them out to individuals who have little or bad credit history. Also, some Secured Credit Cards become regular credit cards after a period of time with successful payments. That way, you can raise your credit limit and continue to use the card just like a regular credit card AND you get your deposit back. These kinds of Secured Cards are ideal because they allow you to build your credit without ruining your credit history by closing.

Step 4) Pay down any Existing High Balances

If you’ve already had some loans and credit history, next step is to pay down those high balances. Amounts Owed, also known as Credit Utilization, make up 30% of your Credit Score. That means, the more debt you Have AND Use, the worse your score will be. Let’s compare side by side with our hypothetical friends, Jordan and Taylor;

Jordan

• Credit Limit: $10,000

• Credit Used: $8,000

• Credit Usage = $8,000 / $10,000 = 80%

Taylor

• Credit Limit: $10,000

• Credit Used: $3,000

• Credit Usage = $3,000 / $10,000 = 30%

As you can see Jordan and Taylor have the same total available credit, but Jordan uses $8,000 a month while Taylor uses only $3,000. That means Jordan’s and Taylor’s Credit Scores are 80% and 30% respectively. The lower your Credit Usage, the better your score will be. Generally, experts recommend keeping Credit Usage below 30%. So, if you already have outstanding debt, you want to start paying down your high balances. There are generally two recommended methods for paying down debt; the Snowball and the Avalanche Method. You can learn more about both at the link above.

Step 5) Pay off your card IN FULL, ON TIME!

Whether all you have is a Secured Credit Card or a series of Credit Cards, the best way to boost your credit score is to pay the whole balance IN FULL, ON TIME! This is critical because leaving revolving debt will kill your credit score. As mentioned above, Payment History makes up 35% of your Credit Score, but payment history isn’t just how long you’ve been paying off debt. Payment History also includes your history of paying on time. Research has shown that you’re ability to pay on time is the leading signal to whether you will continue to pay your bills and that’s why the credit bureaus weigh it so heavily. So if you’re starting from No Credit, you need to make sure that you’re paying your card off on time.

You also want to pay the full balance of debt on the card and not just the minimum payment. Now the minimum payment is acceptable for timeliness and the credit bureaus, but interest will grow and compound on any remaining balance for that line of credit. If you’re only paying the minimum, the interest could grow to a point where you won’t be able to pay the total balance, or even the minimum, after a while and now you’re back in trouble. You’re goal should be to pay the full balance every time, on time. This will also help your Credit Utilization because you’ll have less used credit reported. That’s another 30% of your Credit Score.

If you’re not starting from 0, I do want to clarify I’m not referring to those high balances we talked about early. I know you probably won’t be able to pay those off in full right away because of their size. You will want to pay those down as quickly as you can but you need to do these two items at a minimum; make your minimum payments AT LEAST on time and stop adding debt to those accounts. If you don’t make payments on your older accounts on time, they your payment history will quickly get destroyed and, if you keep adding debt to these accounts, you’ll never be able to full pay them off.

Step 6) Do NOT close Old Accounts

So this may seem like a confusing one for those with high balances since you’ve been working hard to pay those off, but once you do you don’t want to close those accounts. Length of Credit History is 15% of your Credit Score. That means the total time you’ve had credit reported. When you close an account, that credit line is no longer reported, meaning that credit history will be removed from your credit report. When that happens, if it was your oldest credit card, your credit history resets to your next oldest card still being reported. That can cause your credit score to drop, which we don’t want. It would also reduce your overall available credit and hurt your Credit Utilization. The Only Time you would want to close a Credit Card is if the Annual Fees are more Expensive than the Benefits provided. For example, if you had a credit card with a $95 Annual Fee but only get $50 back per year in benefits, you should close that credit card.

Bonus Step) Set up Experian Boost

This is not sponsored by Experian Boost but it is one more way to increase your Credit Score. Generally speaking, rental and utilities payments are NOT reported as part of your Credit Score. That means, even if you’re making all your rent and electric payments on time, that has no effect on your credit score. Well, Experian Boost is trying to change that. When you sign up for Experian Boost (which is completely FREE), the will report certain bill payments towards your Credit Score. These bills range from phone to utilities to even streaming services, such as Netflix, Disney+, and HBO. So when you set up Experian Boost, you have another way to improve your credit score without having to take more debt. Now, I don’t know exactly how much this helps increase your credit score, but it is another avenue as long as you ALWAYS PAY YOUR BILLS ON TIME! If you aren’t paying those bills when you’re supposed to, then setting up Experian Boost will just hurt your score. You can learn more at this link; Experian Boost.

The Wrap-Up

There are plenty of methods to help increase your credit score like the ones here. If you’ve found yourself in extreme debt and think these steps won’t help you, you may need to consider consolidation of debt first. If you’re unsure, speaking with a Certified Financial Planner or Counselor can help you work to solve those issues. What I hope you take away from this though is that;

• You CAN Improve your Credit Score with a little understanding and Discipline

• The more you know about your Credit Score, the easier it is to Build it (Learn more Here)

• Being added as an Authorized User can help your Credit ONLY IF you are added to a Responsible Credit User. Make sure you trust them!

• Secured Credit Cards are a great way to start Building or Repairing your Credit

• Reducing High Balances helps Reduce Credit Utilization to boost your Score

• Paying on Time is KEY to good Credit!

• If you only pay the Minimum, you run the risk of compounding Interest getting out of Hand

• Closing old Accounts Resets your Credit History and Reduces Credit Utilization. DON’T Do It unless you have to!

• Experian Boost is a great extra resource if you don’t have much Credit now and need other ways to boost your score

Your Credit score is Critically Important to your ability to take out loans and make large purchases! Make sure you stay on top of it to set yourself up for success. As always, Financial Literacy is the Number 1 Key to Financial Success, so keep learning!

*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.