How to Build Healthy Credit

Many of us have used our extra time at home to reflect on what we want to include in our lives. I, myself, have started drawing more, and one of my friends is trying her hand at baking. With our social lives on pause, now is when many of us are putting off the inevitable To-Do list. If you fall under the “I keep meaning to work on my credit but I’ve been putting it off” category, this post is for you.

Here are 5 steps that’ll help you build healthy credit:

Knowing is the first step! First, check your credit to know your current credit health. This will help to know what to focus on first. Even if you think you don’t have any credit history, checking is important because you might:

• Have an old delinquent account, such as a medical bill
• Have an account you didn’t realize would report to the bureaus
• Be a victim of credit fraud/ identity theft

You can get a free copy of your credit report once a year at www.annualcreditreport.com. What’s more, due to COVID-19 Experian, Equifax, ands TransUnion are offering free weekly reports through April 2021. This makes now a perfect time to start monitoring your credit so you can build healthy credit!

Pay off or dispute old accounts that are hurting your score! Okay, now you know what all is on your report. If you have any delinquent accounts on your report, you will want to get them taken care of. Call the creditor to see if you can make a payment arrangement to bring it in good standing. If not, paying it in full will help it to age and eventually fall off (most accounts will fall off your report after seven years, although the types of accounts vary). If the account was not yours or is a duplicate, you can dispute it to have it removed. The best place to dispute an item on your credit report is directly through the individual bureau’s website. If the same account is reported to all three bureaus, you will need to dispute it three times.

Start making payments on time and pay down balances! You’ve cleaned up your credit as much as you can. Next is to optimize any open accounts you may have. If you have missed payments, you will have to wait for them to fall off (about 7 years) but luckily, they have much less weight on your score after 2 years. If you start making payments on time today, eventually the on-time payments will offset the missed payments, and your score will increase.

Additionally, if you have high balances on revolving credit you will want to pay it down as quickly as possible. You always want to keep your credit utilization ratio below 30% to maintain a good score. While having a high balance on a loan isn’t necessarily a bad thing, know that the high balance will prevent you from being accepted on future borrowing until it is paid down.

If you’re starting fresh, start establishing credit today! If you checked your report and you have no history, great! Now is the time to start, and you don’t have any repairs to worry about. You will need to borrow in some capacity in order to establish credit. This can be achieved by opening a credit card or get a personal loan. You may need to get a secured card (which requires a deposit) in order to establish credit. If you aren’t ready for a credit card and don’t need a personal loan, check your local bank for a credit builder program. In general, you take out a “loan” which goes into a C.D. and draws interest. Once the loan is paid in full, the matured C.D. is yours to keep!

Don’t be overzealous and hurt your score! It’s easy to get fired up and want to apply for more credit once you’re approved, but you don’t want to open too many accounts at once. It will bring the average age of your accounts down, which will lower your score. In addition, having too many inquiries will lower your score and increase the chance of being denied credit. If you have more than 1 or 2 inquiries on your report, wait for them to fall off (after about 2 years) before applying for more credit.

For more tips that’ll help you build healthy credit, check out our Money Minute blog:

How to Work on Your Relationship With Your Credit Report