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Understanding Credit and How to Build It
How Does Credit Work?
Your credit history is a record of how you’ve managed debt, primarily represented by your credit reports and credit score. Credit reports contain information reported by your creditors, which is used to calculate your score. Understanding how credit works is essential for building a strong credit history.
Types of Credit
Credit accounts come in various forms, but the three major types you’ll encounter are:
- Revolving Credit: This includes credit cards and lines of credit, where you can borrow, repay, and borrow again.
- Installment Credit: This involves loans like personal, student, auto, and mortgages, which you repay in fixed monthly installments.
- Service Credit: Accounts with service providers, such as utility and cellphone bills, which can also be added to your Experian credit file with Experian Boost®.
How to Build Credit With a Credit Card
Credit cards are excellent tools for building credit. Here are some strategies:
Open Your First Credit Card
Consider options like secured credit cards, student credit cards, or hybrid cards. Use your card for small purchases and pay the balance in full each month to build a history of on-time payments.
Become an Authorized User
If you can’t qualify for a credit card on your own, becoming an authorized user on someone else’s account can help. The account’s positive payment history will be added to your credit report.
Pay Your Bills on Time
Payment history is the most crucial factor in your credit score. Ensure you make at least the minimum payment by the due date to maintain a positive payment history.
Maintain a Low Credit Utilization Rate
Keep your credit utilization rate low by not using more than 30% of your available credit. The lower your utilization rate, the better it is for your credit score.
Request a Credit Limit Increase
After several months, consider asking for a credit limit increase to improve your credit utilization rate. Ensure you pay down your debt before making the request.
How to Build Credit Without a Credit Card
If you prefer not to use credit cards, there are other ways to build credit:
Consider an Installment Loan
Loans like auto, mortgage, personal, and student loans can help build your credit if you make timely payments. Credit-builder loans are also an option for those with limited credit history.
Pay Your Loans on Time
Timely payments on existing loans are crucial for maintaining a good credit score. Reducing loan balances also positively impacts your credit.
Add Monthly Bills to Your Experian Credit Report
Use Experian Boost to add eligible on-time payments for rent, utilities, phone, insurance, and streaming services to your credit report.
What Factors Affect Your Credit Score?
Your FICO® Score is influenced by five key factors:
- Payment History (35%): Timely payments are crucial.
- Amounts Owed (30%): Total debt and credit utilization rate.
- Length of Credit History (15%): The age of your credit accounts.
- Credit Mix (10%): Variety of credit accounts.
- New Credit (10%): Recent credit inquiries and new accounts.
What Is a Good Credit Score?
A good credit score is typically 700 or above. Here’s a breakdown of FICO® Score ranges:
- Exceptional: 800 — 850
- Very Good: 740 — 799
- Good: 670 — 739
- Fair: 580 — 669
- Poor: 300 — 579
Why Do You Want Good Credit?
Good credit can help you qualify for lower interest rates, better credit card rewards, low insurance rates, rental approvals, and even certain jobs.
How Long Does It Take to Build Credit?
Building credit takes time, with at least six months needed to establish a FICO® Score. It can take several years to build and maintain an excellent credit history, especially if you have poor credit due to past missteps.
Frequently Asked Questions
- How Do I Establish Credit When I Have No Credit History?
- How Can I Build Credit Fast?
- What Are Credit Mistakes to Avoid?
- How Can I Get Help With My Credit?
Monitor Your Credit to Track Your Progress
Regularly monitoring your credit is essential to track your progress. Consider using Experian’s free credit monitoring tool to keep an eye on your credit reports and scores.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your credit journey and achieve your financial goals.
