How to Build Credit: Showing Your Credit Some TLC
This is the first blog in our Credit series.
When applying for credit - whether it be a loan or credit card - many lenders review your credit report to help determine your eligibility. For example, a good credit score is key when buying a home. But did you know potential employers may request credit checks on applicants in most industries - provided they have written authorization in compliance with the Fair Credit Reporting Act (FCRA)? Discover® reports this is to check potential borrowers’ traits such as organization, trustworthiness, or financial irresponsibility.
Keep in mind if a potential employer decides not to hire you because of something in your credit report, they must provide you a copy of the report and a “Summary of Rights”, according to the Federal Trade Commission. 
It’s possible you already know that because according to the 2019 Experian Consumer Credit Review, 72% of consumers said their credit score is important to them. The fact that you’re here tells me you are likely a part of this 72%. But, maybe your credit score isn’t where you want it to be. The good news is that, with a little TLC, your credit score can improve.
Before we dive into ways to build your credit, let’s first define good credit. Credit scores range from 300 to 850, and they indicate how likely you are to repay and manage debt. Credit scores take into account payment history, types of credit, credit longevity, credit inquiries and activity, debt utilization (actual debt compared to credit limit), and amounts owed.
Experian reported the 2019 U.S. average FICO® credit score was 703. How do you stack up? Perhaps you want to set yourself a goal here. Now let’s talk about how you can work toward that goal…
Your payment track record is 35% of your credit score. Read that again – THIRTY-FIVE PERCENT! Why? Because lenders want to make sure you will pay them back. Not to mention, in January 2020, FICO® announced the new FICO® Score 10 Suite. The new model will put an even greater importance on timely bill payment and ratio of debt to available credit. Here’s the long and short of it: It’s super important to pay your bills when they’re due.
Late or missed payments will not only send your account to collections, and possibly stack up fees, but they could also seriously hurt your credit score. If inability to repay is messing with your credit potential here are a few tips that may help:
According to FICO®, Amounts Owed on accounts determines 30% of the score. Wow! If you’re looking for a quick win to increase your credit score, slaying debit could be the answer my friend. The following shows the key factors that make up the Amounts Owed section of your score:
Build your credit reputation by finding a trustworthy co-signer. Typically this is a parent, responsible friend or close relative with a solid credit score. CreditCards.com reports one in six U.S. adults co-signed for a credit card or loan. But not just anyone can be a co-signer. They need to meet specific criteria, such as:
A co-signer with a strong credit history could shine a positive light on your credit in several ways. And when you’re just starting out or need a credit hand-up, the following are attractive perks:
Being an authorized user has some similarities to having a co-signer since you’re piggybacking off of another person’s established good credit. Essentially, a fee is paid to add the authorized user to “rent” the established account history. Ensure you and the primary card owner understand responsible usage and repayment of the credit is paramount. If one of you racks up debt and poor payment habits, it will affect both of your credit scores. Look for a card owner who can offer:
Open a free checking or savings account to build a good relationship and financial history. Keep your account in good standing so the bank sees positive activity. This may show a foundation of responsible banking and aid in credit offers. Although bank accounts do not show on a credit report, lenders may use your history to decide if you have the ability to take on debt. Here’s how you could build that strong relationship with your bank:
A secured credit card is designed to help build your credit score. Initially, you’ll need to provide a cash security deposit in an account. Your credit limit will be based on this deposited amount. Your credit line is a percentage of the secured deposit which is usually 50-100%. Make sure the lender is actually reporting your positive activity to credit agencies, otherwise this will not help establish credit. Once your credit score is on the rise, you may choose to apply for an unsecured (not already backed by your funds) credit card. These thoughtful actions can help:
We’ve all heard the offers: “I can save you an additional 25% with a [brand] card.” Store credit cards are easy to apply for in-store, usually easier to qualify for, and could help you build credit. But proceed with caution … they normally have higher APRs (annual percentage rates) and lower credit limits compared to other unsecured major credit cards. And applying for multiple store cards could have a negative impact on your credit by decreasing your score and making your financial status look unstable. Here’s how a card could impact your credit:
Pro tip: Bigger companies often own multiple retailers. So if you’re going to apply for a store credit card, do some research to see all the places you can use the card. For example, Gap Inc. owns Athleta, Banana Republic, Gap and Old Navy – so you can get the same card perks at each retailer without having to get a store card at all their stores.
Good credit doesn’t happen overnight, but it can happen over time by making changes where you can. Start building a stronger financial foundation by paying your bills on time, linking up with a co-signer, becoming an authorized user, opening a bank account, or applying for secured or store credit cards - responsibly. With smart monetary planning and execution, you could build the strong credit foundation you want.
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Staff. (n.d.). What is Amounts Owed? Retrieved from myFICO: https://www.myfico.com/credit-education/credit-scores/amount-of-debt ↩︎
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Avery, R. B.; Brevoort, K. P.; Canner, G. B. (2010, March 5). Credit Where None Is Due? Authorized User Account Status and “Piggybacking Credit”. Retrieved from Federal Reserve: https://www.federalreserve.gov/pubs/feds/2010/201023/201023pap.pdf ↩︎
Gravier, E. (2020, July 22). Your bank accounts don’t affect your credit score, but they still play a vital role in getting credit. Retrieved from CNBC: https://www.cnbc.com/select/how-bank-accounts-impact-credit/ ↩︎
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Staff. (n.d.). Founded in 1969, Gap Inc. owns Gap, Banana Republic, Old Navy, Athleta and Intermix and operates in more than 90 countries. Retrieved from Business of Fashion: https://www.businessoffashion.com/organisations/gap-inc ↩︎