Bad credit can cost you significant funds in the future or even delay important life milestones.
One in four American adults admit they don’t pay their bills on time and nearly one in ten now has debts in collection, according to the NFCC. 2018 Consumer Financial Literacy Survey, sponsored by BECU. Many people often don’t realize the financial consequences that can result from late payments and the long-term negative impacts this can have on their credit.
When buying a house or a car, looking for a cell phone plan, or even applying for a job, having bad credit can cost you significant funds in the future or even delay important milestones in your life. Whether you’re building your credit history or just wanting to boost your score, there are steps you can take to set yourself up for success.
How does credit work
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 will pay them back. “Credit scores go 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 regularly pay your bills on time), the amount of your debt, the time you have spent managing credit (the longer accounts are open, the better), if you’ve recently opened new credit accounts, and what 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 a good credit history, you can enjoy all kinds of benefits, including better loan terms and increased borrowing power.
Building good credit doesn’t have to be difficult – it just takes a little know-how and discipline. Here are five ways to get started today.
Use your credit card responsibly
A credit card is a valuable tool in helping to manage daily expenses. Using a credit card makes it easy to track discretionary spending and adjust the pace of those spending as needed to stay on budget.
However, every consumer is different. Some of us are naturally good at cutting spending, while others have to keep scrupulous records in spreadsheets or use smartphone apps to control spending. Being responsible with a credit card involves knowing what type of consumer you are.
Black says even though it’s good for everyone to carry on build strong credit, we need to manage our cards wisely. “When I run credit workshops, I often recommend that you always leave your credit cards open, even if they are rarely used,” says Black. “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 your 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 stay on your credit report for up to seven years.”
An easy way to make sure 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 each month and you can easily change the amount as needed,” says Black.
Understanding the impacts of a new loan
How many times have you gone to your favorite store to check out and asked if you want to save on your purchase? While new credit cards can lead to short-term gratification, opening multiple accounts in a short period doesn’t look good and can negatively impact your long-term credit score.
“I recommend that people don’t apply for new credit just to get a discount,” says Black. “Every time you apply for a new credit card, it can lower your credit score. Applying or opening multiple credit cards at once can signal lenders that you are having financial problems.
Consider a secured credit card
If bad credit in the past has thwarted your ability to get new credit, if you are building a credit history, or even just want collateral for spending on credit, there are strategies created just for you.
“A secured credit card offers the opportunity to start creating credit responsibly and offers all of 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 the event of a default, and can help people feel more invested in making payments.”
Choosing the right financial institution
Financial institutions can be a great resource for learn more about credit scores and personal finances. “A lot of times 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’re considering making a change, it’s important to consider all the services you might need in an institution – now and in the near future – to help you find the right one for you.”
When choosing a financial institution, Black recommends that you consider potential fees, interest rates, convenience, and online banking capabilities.
Your credit report is your financial report card. Since it can affect 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 Transactions Act, from all three credit bureaus via annualcreditreport.com.
As a non-profit, member-owned credit union, BECU focuses on improving the financial health of its members and communities through better rates, lower fees, community partnerships and financial education.