Poor credit can cost you significant funds in the future or even delay major life milestones.
One in four U.S. adults admit they do not pay their bills on time and nearly one in 10 now have debts in collection, according to the NFCC’s 2018 Consumer Financial Literacy Survey, sponsored by BECU. Many people often don’t realize the financial consequences that can result from making late payments, and the long-lasting negative impacts it can have on one’s credit.
When you buy a home or a car, look for a cellphone plan or even apply to a job, having poor credit can cost you significant funds in the future or even delay major life milestones. Whether you’re building your credit history or simply wanting to increase your score, there are steps you can take to set yourself up for success.
How credit works
According to BECU Financial Educator Stacey Black, credit is the ability to buy now with the agreement to pay later, while a credit score is the number that tells lenders how likely someone is to repay them. “Credit scores range from 300 to 850, with the higher end of the range being better,” says Black.
Factors that contribute to a credit score include payment history (whether you consistently pay bills on time), the amount of debt you carry, the amount of time you have been managing credit (the longer accounts are open, the better), whether you have recently opened new credit accounts, and also the types of credit you have.
Responsible management of the above results in good credit. And, good credit is something that pays off every day. With a higher credit score and good credit history, you may qualify for all kinds of perks, including better terms on loans and increased borrowing power.
Building good credit doesn’t have to be hard — it just requires some know-how and discipline. Here are five ways you can get started today.
Use your credit card responsibly
A credit card is a valuable tool in helping to manage daily spending. Using a credit card makes it easy to track discretionary spending and adjust the pace of that spending as necessary to stay on budget.
Every consumer is different, though. Some of us are naturally good at curbing our spending, while others need to keep scrupulous records in spreadsheets or use smartphone apps to keep their spending in check. Being responsible with a credit card entails knowing what kind of consumer you are.
Black says that while it’s good for everyone to continually build strong credit, we must manage our cards judiciously. “When I’m leading workshops on credit, I often advise to always leave your credit cards open, even if they are seldom used,” Black says. “However, I also suggest that if someone has too many credit cards and it becomes difficult to manage, consider closing the newer ones or the ones that charge the highest annual fees.”
Always make your payments on time
Paying bills on time is the most important thing you can do to maintain and improve your credit score. “When your payment is more than 30 days late, it can have a significant impact on your score,” says Black. “In fact, late payments can remain on your credit report for seven years.”
One easy way to ensure credit card payments are always made on time? Use automatic payments. “Signing up for automatic payments eliminates the need to ‘remember’ to pay the credit card bill every month and you can easily change the amount as needed,” explains Black.
Understand the impacts of new credit
How many times have you gone to check out at your favorite store and been asked if you’d like to save on your purchase? Although new credit cards may result in short-term gratification, opening several accounts in a short period of time doesn’t look good and can negatively impact your credit score in the long-run.
“I recommend that people don’t apply for new credit just to receive a discount,” explains Black. “Every time you apply to open a new credit card, this can lower your credit score. Applying or opening multiple credit cards at once may indicate to lenders you are having some financial problems.”
Consider a secured credit card
If bad credit from the past has foiled your ability to get new credit, if you’re building credit history, or even if you would just like some safeguards around spending on credit, there are strategies created just for you.
“A secured credit card provides the opportunity to start building credit responsibly and offers all the benefits of a credit card, but usually with lower spending limits,” suggests Black. “The difference is that a secured credit card requires you to make a security deposit, which is used as collateral in case of default on the loan, and can help people feel more invested to make payments.”
Choose the right financial institution
Financial institutions can be a great resource to learn more about credit scores and personal finance. “Oftentimes, people decide to stick with the financial institution they had when they were younger and haven’t explored other options,” says Black. “And if you are considering making a change, it’s important to consider every service you may need out of an institution — now and in the near future — to help discover the right one for you.”
When choosing a financial institution, Black recommends that you factor in potential fees, interest rates, convenience and online banking capabilities.
Your credit report is your financial report card. Since it can affect so many areas of your life, it’s important to understand how it works and how to build good credit. Free copies of your credit report are available annually, thanks to the Fair and Accurate Credit Transaction Act, from all three credit-reporting bureaus through annualcreditreport.com.
As a member-owned, not-for-profit credit union, BECU is focused on helping increase the financial health of its members and communities through better rates, fewer fees, community partnerships and financial education.