Credit Score: Build, Repair & Maintain

Your credit score is pivotal at every stage of your financial journey. Whether you’re familiar with them or not, credit scores are a vital determinant of your financial health and can significantly impact your life. They are ubiquitous factors that can’t be ignored, from loan approvals to interest rates, rental opportunities, and job prospects.

What is a credit score?

A credit score is a number that represents the relative risk in your ability and willingness to repay credit. Three credit bureaus generate these scores based on lenders reporting your repayment history: Equifax, Experian, and TransUnion. Each of these organizations has its unique way of factoring in your credit history to calculate a score, but the result will be similar between all three. Lenders will then pull your credit report from one or more of these bureaus to understand your creditworthiness.

A stellar credit score can be a game-changer, opening doors and saving you money in various aspects of life. For instance, a few percentage points difference in the APR of a 30-year mortgage can translate into significant savings, even for a moderately priced house. Moreover, building a good credit score requires discipline and showing financial responsibility, which will set you up for other areas of financial success.

How to Build or Repair Your Credit Score

The ideal way to build credit is to start early and practice good habits immediately. However, it’s never too late to start. I recommend parents help every teenager in the United States develop their credit score. Someone who begins building in their teenage years with the proper knowledge and habits can get a credit score of 800+ (considered “excellent” and qualifies for the best loan rates) in their 20s.

Developing a Great Credit Score

Though minors can’t take out credit themselves, they can piggyback on their parents. Adults can add children as authorized users on their credit cards. An authorized user is not considered an account owner but is simply someone authorized to use the account. As the adult owner of the card pays off the balance consistently, the authorized minor will build credit as well—they don’t even need access to the account or spend money themselves. If the account owner misses a payment, the authorized user’s credit history should not be negatively affected.

Most young adults won’t have enough credit history to get approved for most forms of credit independently. If you are 18-20 and looking to rent an apartment, your parents will likely have to cosign with you. Whether you pay your entire rent or your parents help you (or even pay it all for you), you will build credit. If your parents want to pay your entire rent, ensure your name is on the lease to benefit your credit. Just know that your credit history will suffer if the rent is unpaid.

Another big step a young adult can take towards building a solid credit history is opening a starter credit card. For many, this can be a simple no-yearly-fee card, many of which have 0% intro APR offers and minimum spend bonuses. A couple of great starters are the Chase Freedom cards. I’ve had both cards for a while and have no intention of giving them up.

As of writing, both come with a 15-month 0% introductory APR, carry no yearly fee, and have the default Chase spending category multipliers. One of the best parts for me is that they pay out $200 worth of points after spending $500 within three months of opening the account. The main difference between the two cards is that Freedom Unlimited gives unlimited 1.5% cashback on all purchases. In contrast, Freedom Flex offers 5% cashback on purchase categories that rotate quarterly up to a total limit.

If you are interested in the Freedom cards and want to apply, use my referral link if you got value from the article. If you get approved, I can earn Chase rewards. Also, read more about how the Freedom cards play an essential role in the Chase Trifecta credit card strategy.

Secured Lending to Build Credit

You can open a secured card if you don’t have enough credit history to qualify for a Freedom card. Most credit cards are unsecured, meaning no collateral guarantees the lender will get repaid, which is riskier for the lender. On the other hand, secured cards use a separate savings account as collateral. You deposit money into this savings account, and the amount you deposit will become your credit limit (the maximum you can spend on the card). You generally can’t withdraw this money until you close the card. The secured card is also a powerful method to rebuild credit for those with damaged credit scores who can’t qualify for unsecured debt.

You can use a secured loan to build or rebuild your credit like a secured card. You will open the loan with collateral in a locked account. Open a different savings account and deposit an amount equal to the principal of the secured loan plus total interest. Set up an autopay to make monthly payments from this savings account and forget about it. Rinse and repeat once the loan is paid in full (in about six months or so). 

Another method to help build or repair your credit score is using a debit card that builds credit. You can sign up for certain debit cards on which you can only spend money you already have in your account. The company facilitating the card will then lend you the money for your purchase, immediately take the money from your checking account, and report this successful loan repayment to the bureaus. It functions like a regular debit card, but the technicality of the company lending you the money and immediately paying it back to itself allows you to build credit from it.

The Do’s and Don’ts of Maintaining Your Credit Score

Do:

• Pay all bills on time, including rent, utility, and credit card bills. Timely payments are the most crucial factor in your credit score.

• Pay off high-interest debt as soon as possible—anything above 6-8%.
  
• Keep as many accounts open as possible. The average age of your credit accounts contributes to your score—the older, the better. Only close an account if it costs you more than it’s worth, for example, a credit card with a high yearly fee for which you don’t get an equal or better value.

• Pay a little money on your credit card every so often and pay it off in full. Not using your credit card for extended periods may prompt lenders to cut your credit limits.

• Check your credit score frequently. Doing this will keep you aware of any changes and may even help you detect mistakes or identity theft early on. Many free tools are available, such as Credit Karma and banking apps.

Don’t:

• Don’t make late payments. Ever. Seriously, don’t. Use autopay, alarms, calendars, or whatever it takes. You can even ask your parents to remind you (I won’t judge).  Making the minimum payments is mandatory.

• Do not let anyone take out credit in your name or agree to become a cosigner unless you trust them to make all their payments on time. If you plan to let someone else piggyback on your credit, you are essentially putting your financial wellness for years to come into their hands.

• Don’t apply for an excessive amount of credit.
  • Every time your credit report is pulled while you apply for a loan, your credit score will go down; this is called a “hard pull.” The less credit history you have, the more it will be impacted. An example of a soft pull is checking your score through a free service, which won’t affect your score.
  • Hard pulls of the same type within a short time may be grouped as one, though, to allow for rate shopping.

• Don’t carry a balance on a credit card (outside of a 0% APR period). The idea is to build credit to build wealth. Paying 22% APR defeats this goal. If possible, pay your card off in full every statement.
  • Contrary to a popular myth, carrying a balance does not build credit faster.
  • “The cockroach of credit scoring myths, the one that just will not seem to die, is that carrying a balance on your credit card helps boost your credit score,” Matt Schulz, chief credit analyst at LendingTree, tells CNBC Make It. “It’s just not true.“

• Don’t use too much of your available credit. Using more than 30% of your available credit can cause your score to go down. Your available credit is the sum of the credit limits on all your accounts.

• Don’t apply for or use more credit than you can repay.

Schedule a complimentary consultation with me today and get a comprehensive credit review as part of your DreamVision financial plan!