Building Good Credit
A good credit history can be one of your greatest financial assets. Understanding some basics of credit will help you build, and keep, a strong credit history.
Why Your Credit History Matters
- With good credit, you'll be more likely to be able to borrow when you need to.
- In some cases, a strong credit rating will make you eligible for a lower interest rate or better borrowing terms.
- Your credit rating can also impact other areas of your life. Some employers won't hire an applicant who has a poor credit history.
- Poor credit stays with you for a long time. A missed payment can show up on your credit report for up to seven years.
Understanding Your Credit History
When you're applying for credit, lenders will evaluate your credit report. Your credit report generally includes:
- Identifying information, such as your name, address and Social Security Number.
- Credit accounts that you currently have, or that you've had in the past seven years. This information includes the type of account (credit card, car loan, mortgage, etc.), the date you opened the account, the amount of the loan or credit limit and your payment history.
- Inquiries. Any time you apply for credit, you authorize the lender to access your credit report. The Inquiries section identifies anyone who has requested your credit report in the last two years.
- Public record and collection items, including bankruptcies, foreclosures, wage attachments, and collection actions taken against you.
- What's not on your credit report: your gender, race, nationality or marital status. The law prohibits lenders from considering these factors.
The credit reporting agencies assign you a credit score, which is based on:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit in use
Lenders consider your credit score as part of their evaluation. To build and keep a good credit score:
- Pay your bills on time. Late payments negatively affect your credit score.
- If you've fallen behind on any payments, catch up and stay current. Establishing a pattern of timely payments will raise your score.
- Keep debt to a minimum. High debt can work against you if you're applying for a loan.
- Don't open new accounts that you don't need. The score considers credit that's available to you, not just the amount you've actually borrowed.
- Take advantage of time. A longer credit history will generally increase your score, as long as your payment history is good.
- Build credit slowly and responsibly. Too much new credit can work against your score.
In addition to your credit score, lenders will examine your income and employment history, among other factors.
Additional Tips For Building Good Credit
- Pay all of your bills on time and in full.
- If you don't pay in full, pay the highest monthly payment you can afford.
- If you're just starting to build credit, consider a co-signer, particularly for a secured loan such as a car. Keep in mind that your co-signer's credit will be harmed if you don't make your payments on time and in full.
- Many borrowers' first loan is a Student Loan. A Student Loan can help you build good credit - or harm your credit. A Student Loan, like any loan, must be repaid.
- Be sure you fully understand the terms of your credit agreement. This can help avoid unexpected fees, such as late fees, and keep you within your credit limit.
- Don't exceed your credit limit.
- Keep track of your credit card spending so you'll know what to expect when the bill comes.
- Be sure to notify your lender or credit card issuer if you change your name or address.
- Monitor your credit report, at least annually. It's important to ensure that your report contains accurate information, and an annual examination can alert you to any errors.
You can receive a free copy of your credit report once a year.
Visit annualcreditreport.com or call 877-322-8228 to see your credit
report from each of the three major credit bureaus.
Note: This site offers free annual credit reports. Other sites may charge a fee.
If you have questions about what's on your credit report, call the credit bureau:
- Equifax: equifax.com/fcra, 800-685-1111
- Experian: experian.com/reportaccess, 888-397-3742
- TransUnion: transunion.com/myoptions, 800-916-8800
For information on your FICO credit score visit: myfico.com
Credit Building Don’ts
- Be very careful about paying a fee to obtain a loan or credit card. If you have good credit, you don't need to pay someone to find a loan or credit card for you.
- If you've had credit problems, don’t pay anyone to "fix" your credit. Credit can only be repaired through disciplined repayment of your debt over time. There is no shortcut.
Handling Repayment Difficulties
Don't panic! Follow these steps for handling repayment difficulties.
- Be proactive. As soon as you see a problem, contact your creditor.
- Don't borrow more. While it may be tempting to borrow to pay bills, it just adds to the amount you owe.
- Do consider consolidating your debts. Consolidating your current debts into one loan may provide you with a lower payment, as well as fewer bills. Consider how much you'll actually pay over the life of your loans.
- Talk with a non-profit credit counselor such as Consumer Credit Counseling Services. They'll help you establish a budget, and work with your creditors to develop a revised repayment plan that you can manage.
Repairing Your Credit Report
Sometimes your credit report is damaged because of errors or fraud. In these cases, don't despair - help is available.
- If there's an error on your credit report (falsely reporting a missed payment, or attributing someone else's credit to you), Federal law requires the lender to correct it, as long as you can prove it's an error.
- If you dispute something contained in your credit report, you can write an explanation, which must be attached to your credit report and provided to anyone who requests the report.
If you have a problem with someone else using your identity or your credit, act immediately.
- Contact the Fraud Department at any one of the three major credit bureaus to place a fraud alert on your accounts (please note, these numbers are to report fraud only).
- Discuss next steps with your financial institution.
- File a police report.
- File a complaint with the Federal Trade Commission at www.consumer.gov/idtheft.
- To send an email that contains confidential information, please visit the Secure Message Center where there are additional instructions about whether to use Secure Email or Online Banking messaging.