This is a brief overview of credit and what you can do to improve yours. For a fun and thorough lesson, register now for our Croissants and Credit workshop at our brand new Financial Literacy facility Saturday, April 21.
What is Credit?
Credit is the ability to obtain a product without paying for it upfront. This is based on good faith that the customer will make payments in the future. Typically, you have to pay the full price of the product plus interest over time.
Why is Credit Important?
Most people think of credit for big purchase items, but credit has an impact on much more. Of course, your credit is still important for those big-ticket items such as a car or a home. But, your credit may be checked when applying for a job, renting an apartment or putting utilities in your name. Good credit can give you better deals on credit cards and insurance rates.
Here are a few ways to improve your credit:
1. Establish Credit
The first step to improving your credit is to have credit to begin with. Most of the time it takes having an open account for six months before this account gets reported. If you are looking to establish credit, a good way to start is to open a credit card and make on-time payments with it, which leads us to our next point.
2. Make Your Payments On-Time
Establishing credit is only good if you establish good credit. Does that seem redundant? Well if you open an account and miss payments or make late payments, that hurts your credit. In this case, you would have been better off having no credit. Scheduling auto-payments is a good technique to ensure your payments are on-time.
3. Avoid Meaningless Inquiries
It’s a bit of a catch-22 here. You want good credit so you can apply for better loans. And to get good credit, you need to apply for loans. BUT, applying for loans implies financial risk and can actually hurt your credit! Did we lose you there? Multiple credit inquiries can hurt your credit, but as long as that amount is less than five or so every two years, you should be fine. The goal here is to avoid applying for credit without a good reason.
4. Get a Co-Signer
Have you been denied a loan that you really needed? Adding a co-signer with good credit can help approve you for better loans. However, this co-signer would be legally responsible for the payment with you, so you want to be careful when selecting a co-signer.
5. Pay Off Your Debt
Your overall amount of debt greatly impacts your credit, so paying as much of it off as possible will help. Additionally, a large payment made sooner will prevent you from paying the interest that accrues over time.
6. Dispute Any Errors
All three major Credit bureaus are required by law to provide one free credit report. You can request your credit report from annualcreditreport.com. If you see anything that appears to be a mistake or fraudulent, dispute this with the bureau. If they do not help and you are sure it was incorrect, you may need to hire a lawyer.