5 Things You Should Know About Establishing Credit
Heeding these five tips can help you get started on the right foot.
If you want to buy a house or car, or pretty much anything that involves borrowing funds, you want to have a strong credit profile. It will grant you access to lower rates and more favorable terms. However, establishing your creditworthiness can be a difficult task. After all, it's hard to show a good payment history when no one wants to lend you money in the first place. Heeding these five tips can help you get started on the right foot.
1. Borrowing Isn't Always Bad
Oftentimes, individuals working to build credit will eschew borrowing. While that might help keep debt to a minimum — which is definitely good — it also doesn't give you an opportunity to show that you have responsible money management skills. In other words, potential lenders can't see a history of on-time payments in your credit history. It's perfectly acceptable to open a revolving credit account. If you have no credit established, obtaining a secured credit card or line of credit is a good way to get yourself started.
2. Credit Scores and Credit Reports Are Not the Same Things
Your credit report and credit score are two separate things. They are, however, closely tied together. Your credit report is a comprehensive accounting of your credit history. It includes any accounts you open and how often you apply for credit. It also looks at late or past due payment and debt collections. Certain public records, such as bankruptcies and liens, will also appear on your credit report. As a whole, the report gives a picture of your creditworthiness. Most lenders will not look at the whole credit report but will instead choose to review your credit score. The information from your credit report is put through calculations to determine a numeric score. Late payments, high balances in relation to credit lines or an unusually large number of open accounts can all negatively impact your score.
3. You Can Request a Free Copy of Your Credit Reports
Sometimes there are old accounts or bad information on a credit report that can also bring your credit score down. Checking your reports each year will minimize the chance that this happens. When you want to start building credit, you should check your reports to ensure any information the reporting agencies have is valid. If you spot an error, notify the agency immediately. It could be a simple mistake, but it could also be a case of identity theft.
There are three major credit reporting bureaus and each one keeps a separate listing. Under federal law, you can request a free copy from each bureau once every 12 months. If you spread that out throughout the year, you will be better able to spot suspicious activity early.
4. Good Credit Habits Can Boost Your Score
There are five main things from your credit report that affect your credit score. They are your payment history, how much of your credit you are using, the number of inquiries made, the types of accounts you have open and how long each account is open. Focusing on these factors will help you build a strong credit profile. A few good credit habits you want to develop include:
Always pay bills on time
Do not max out credit cards or lines of credit
Build a diverse credit portfolio
Keep older accounts open, even if you don't use them
5. Older Accounts Carry More Weight
It can be difficult when you are trying to first establish a solid credit profile. One reason for that is that approximately 15% of your score is based on the length of your credit history. Older accounts, especially those over 10 years old, carry more weight by showing a stable history. So, if you have any older accounts, you should keep them open. That applies even if you don't use them. It shows a longer credit history and also raises your maximum available credit.
With work and a close eye on your credit reports, you can build a stable credit history. Maintain good credit habits and keep older accounts open to maximize your scores and get access to favorable lending terms.