Credit is essential in today’s modern world. In fact, having credit is needed for many typical adult expenses. However, when you’re first starting out, building credit can be challenging. Or, if you have a lower credit score, rebuilding that score to a higher number can feel like an uphill battle. Here is everything you need to know about building your credit score, and why this challenge is well worth the fight.
What is Credit
First and foremost, what is credit? Simply put, your credit score shows banks, lenders, companies, or landlords how likely you are to pay back something you owe, or, the likelihood of you paying a specific bill or expense on time.
Look at credit as your financial reputation. The more financially responsible you are, generally speaking, the higher your credit score. The less financially responsible you are, the lower your reputation becomes, and as a result, your credit score decreases.
Why is Credit Important
Having a high credit score is so important for a variety of reasons. The two most important reasons must be:
- The higher your credit score is, the less risky a lender considers you, and for that reason, the lender will typically reduce the interest rate they charge for borrowing money. For example, assuming everything else is equal, if two people are applying for a mortgage, the person with a credit score of 750 will likely receive a more preferential rate than the person with a credit score of 600.
- The second reason why having a higher credit score is important is so you are actually approved to borrow money, or, so a landlord approves you renting their apartment or home. If you have a bad financial reputation or credit score, you may be denied various loans, and a landlord has the right to deny your right to rent their home.
What is a Good Credit Score?
A credit score is a number rating between 300 and 850. The higher the number, the better. Here is the score breakdown:
- A credit score between 300 and 629 would be a bad credit score
- A credit score between 630 and 689 would be a fair credit score
- A credit score between 690 and 719 would be a good credit score
- Anything over 720 would be considered an excellent credit score
How Do You Build Credit
Building your credit isn’t an exact science, but there are certain tried and true ways you can elevate your credit score. Let’s review some common ways to build credit below.
- If you are first starting out, one of the hardest things about building credit is the fact that a financial institution must first give you a chance to prove your financial trustworthiness. This could be challenging, but one of the ways to combat that challenge is to apply for a credit card with a low limit. Perhaps that limit is $100 to $250. It’s a relatively low risk on the bank’s behalf and gives you an opportunity to prove yourself.
- Put a bill in your name. Even if you live at home, putting a bill in your name, and paying the bill on time each month, will help elevate your credit score. Consider putting the phone bill or water bill in your name.
- Pay your existing debt on time. If you currently have debt, perhaps student loans or medical bills, be sure to pay that debt on time. You don’t need to pay the debt off in full to elevate your credit. Keep in mind, credit is built by demonstrating your ability to consistently meet financial obligations.
- Avoid excess debt. A little bit of debt allows you to demonstrate your ability to pay off your debt bill on time. Too much debt can bring financial insolvency. Banks do not want to see individuals drowning in debt, and too much debt can actually hurt your credit score!
Rebuild Your Credit Score
If you are trying to rebuild your credit, the same steps above can certainly apply to your situation. However, you should also complete a few credit reports to get an understanding of what’s currently on your credit report that can be hurting your overall credit score.
Perhaps you notice a debt is on your credit report, but you are 100% sure you paid off this debt. In fact, you have proof! You are welcome to dispute anything on your credit report, so long as you can back it up with proof a debt or bill was paid. If so, the negative impact this is having on your credit will be reversed, and you’ll notice your credit improve.
Credit is Important, But Don’t Forget About Everything Else
Your credit score is at the center of many important financial decisions. Whether that includes buying a house, financing a car, or getting approved to rent an apartment, all lenders and landlords will want to see they are lending money, or their property, to someone who will repay them on time. Credit is just one aspect of one’s overall financial picture. Working with a professional financial advisor is a great way to ensure you are taking in the full financial picture, and that you are properly managing your money. Proper money management is too important to not get right, which is why financial advisors can be so instrumental in helping you.