Establishing and Improving Your Credit

Establishing and improving your credit score is crucial for financial stability and access to favorable loan terms. By following a few key practices, you can gradually build a strong credit history.

Start Early: Begin building credit as soon as possible after age 18. A good way to get started is to check if your bank has any pre-approved credit card offers for you. Typically, credit scores start in the 600s range. Over time, good habits will help you reach the "good" score range of 700s. An "excellent" score of 740+ may take many years of maintaining good habits.

Pay on Time: Maintaining a positive payment history is vital. Ensure you make all your payments in full and on time. Late or skipped payments can negatively impact your credit report for up to seven years. To avoid this, exercise caution with your spending and consistently make timely payments.

Manage Credit Utilization: To maintain a healthy credit utilization ratio, strive to keep your outstanding balances low. Your credit utilization ratio is the amount of credit you have outstanding (due) compared to your credit limit. It is recommended to keep this ratio under 30% and ideally under 10%. For example, if your combined credit limit across all cards is $1,000, try to keep the total statement balances below $300, or ideally around $100.

Monitor Your Credit: Regularly checking your credit score is essential for staying aware of your financial standing. You can access your credit score through your bank or services like Credit Karma. Additionally, obtain a free credit report from annualcreditreport.com annually to review it for any errors. The three major credit bureaus—TransUnion, Experian, and Equifax—provide individual credit scores, which should generally be within 10 points of each other.

Avoid Excessive Credit Applications: Be cautious when applying for new credit, as multiple inquiries and frequent inquiries can temporarily lower your score. For instance, if your credit score is 760 and you apply for a new credit card, your score might decrease to 745. Your score will go down because applying for credit has a negative impact on your credit until you can prove you can handle the new credit card payment. Frequent inquiries can also raise concerns and prevent you from being approved for new credit.

Diversify Your Credit: Maintaining a diverse mix of credit accounts showcases your ability to manage different types of credit responsibly. While it's not necessary to have various types of credit to achieve a high credit score, over time, it tends to be more common. Examples of credit accounts include mortgages, car loans, student debt, credit cards, buy-now-pay-later arrangements, or any other payment plans established through financial institutions.

Protecting Your Credit: Safeguarding against identity theft and credit card fraud is crucial to preserving your credit score. The process of rectifying credit report errors and resolving ongoing fraud can be time-consuming and expensive, estimated to cost up to $10,000 and take 2-3 years. To proactively prevent fraud, consider subscribing to a credit monitoring service that alerts you to changes in your credit report. Some employers, banks, or credit cards may offer this benefit as well. Additionally, placing an alert on your credit through each of the three bureaus will require them to verify your identity before making any changes to your credit report, such as opening a new account. For more stringent protection, you can opt for a permanent credit report freeze through each credit bureau, which automatically denies any attempts to access your credit report. In such cases, you can still allow access to your credit report by temporarily lifting the freezes when necessary.

Remember, being proactive in managing your credit, practicing responsible financial habits, and regularly monitoring your credit score are essential for building and improving your creditworthiness.

- Kyle McCune, CFP®, Worley Erhart-Graves Financial Advisors