Credit Building
What Is Credit Building ?
It’s no secret that your credit history and score play an important role in your financial life. Your credit can both open doors for you and close them, depending on whether or not you have built a strong history over the years.
Whether you’re just looking to boost your credit score or have a specific financial goal in mind (e.g., buying a car, renting an apartment, or taking out a loan), credit building is a great way to set you on the right financial path. Here’s a look at why credit building matters and how to do it.
What is Credit Building?
As the name implies, credit building is the act of strategically building (and improving) one’s credit. This can be important if you have a negative credit history to overcome, or simply haven’t had enough credit-based accounts in the past.
With credit building, your goals are threefold. It can help you:
- Demonstrate responsible credit management
- Boost your credit score
- Open the door to better financial products and rates
Why is credit building so important? Well, your credit history is taken into consideration anytime you apply for a new account, like a loan or credit card. Your credit also gets checked when you apply for insurance (whether life, auto, or homeowner’s), to rent an apartment, and sometimes for a job.
How to Build Credit
Credit building is a many-sided process because your credit score calculation is also multifaceted. No matter which credit scoring formula is used (FICO, VantageScore, etc.), it will take into account your:
- Payment history (whether you make your payments on time or not)
- Credit utilization (how much of your total credit limit you’re using)
- Average age of accounts (how long you’ve been building your credit)
- Mix of accounts (which different types of accounts you hold)
- Recent hard inquiries and any new accounts you’ve just opened
With that said, there are many different ways you can build your credit, depending on your situation and how quickly you want to boost your score.
Building credit could include opening a new credit card account that you responsibly manage and pay off. It could mean limiting the number of inquiries you allow in a given year. Or, it could come in the form of a new loan that you pay back on-time each month.
Using a Loan to Build Your Credit
Taking out a loan is one popular way to build credit. With this approach, you would apply for a small loan, whether or not you really need to borrow the funds. You would then pay off that loan each month according to your payment schedule, until the balance is paid.
You can even put the funds from that loan into a savings account, and use them toward your monthly loan payments!
Over time, your credit score will improve because the account will age, you’ll have a positive payment history, and your credit balance will be kept in check (good for your credit utilization ratio) as a result. Plus, since it isn’t a credit card, there’s no risk of you overspending on the account and racking up additional debt.
The problem is that applying for a new loan (or credit card) can be difficult if you don’t already have a good credit score to begin with. It’s a bit of a chicken and egg situation.
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