How Is Credit Established?
There are many different ways to build up a good credit history and a few ways to hurt it. Even if you have never made a major purchase, there are steps you can take to begin building your credit.
- Open a checking/savings account, or acquire a debit card. These alone will not help your credit, but they will indicate that you have money and you can manage it. Our VISA® Debit Card offers a monthly cash-back rebate with qualifying transactions.
- Apply for a major credit card. Use it responsibly and pay those credit card bills back on time. We offer VISA® Credit Cards designed to suit your individual needs.
- Apply for a small loan or line of credit.
- If you share housing and utilities, make sure a few of those bills are in your name and pay it on time.
- If you have a student loan, be sure to make regular, on-time payments.
- Co-sign with a person who has established good credit. Once the co-signing has occurred, simply make your payments on time.
To avoid hurting your credit score:
- Avoid missing payments on bills or loans. Even late payments count against you. If you can't make a full payment, make some kind of payment.
- Don't let other people use your credit card accounts. You are responsible for your account, no matter who uses the card.
- Don't overdraw your accounts. You will be charged fees, and you can damage your credit record.
Favorable credit history doesn't happen overnight, but by taking care of your credit, over time, you will establish good credit history. Remember, you can get a free copy of your credit report every year. Here's how to order one:
What Affects My Credit (FICO) Score?
Your credit score (called your FICO score in the United States) is a number that represents your credit worthiness and indicates the likelihood that you will pay back your debts. Banks and credit card companies use this number to evaluate the potential risk you pose, should they lend money to you.
FICO scores range between 300 and 850. The majority of scores fall between 650 and 799, and according to FICO, the median score is roughly 720.
It is a good idea to understand what affects your credit score.
- 35%: Payment History - Paying on time can mean the difference between an average and exceptional FICO score. Late payments on bills, such as a mortgage, credit card or automobile loans, can cause a FICO score to drop. However, if you have a slip up and forget to pay a bill from time to time, it won't affect your credit score dramatically, as long as you have already shown a history of paying on time.
- 30%: Amount Borrowed Compared to Available Credit - The credit utilization ratio is the current revolving debt (such as credit card balances) compared to the total available credit or credit limit. FICO scores can be improved by paying off debt, which lowers the credit utilization ratio. Alternatively, if you have your credit limit increased, this will also drive down the utilization ratio.
- Opposite of common belief, when you close existing revolving accounts, this will actually adversely affect your credit utilization ratio, not improve it. Therefore, it is important to keep those accounts open with a little activity that is paid off each month.
- 15%: Length of Credit History - As credit history ages, it can have a positive impact on your FICO score. People with scores over 800 typically have at least three credit cards open for over seven years.
- 10%: Types of Debt - Your FICO score is positively influenced by showing a history of managing different types of credit successfully (installment vs. revolving debt). Installment debt, such as an auto loan, is looked upon more favorably than revolving debt, such as credit cards.
- 10%: Credit Searches - Credit inquiries, which occur when consumers are seeking new credit, can hurt scores, especially if they happen in a short span of time. Exceptions to this include: all mortgage inquires within 30 days of each other will be lumped together as one inquiry; for autos, the timeframe is 14 days.
Remember, you can get a free copy of your credit report every year or any time you are denied credit. Here's how to order one:
When A Credit Card Is Paid Off, Is It Better To Leave It Open Or Cancel The Card?
Thirty percent of your FICO score is made up of the amount you have borrowed compared to the amount of available credit you have (called the credit utilization ratio). High credit card balances will hurt your credit score; however, FICO scores can be improved by paying off debt, which lowers the credit utilization ratio.
Once you have that victory of paying off a credit card and bringing the balance to zero, the first thing many people do is immediately cancel the card. But this is the wrong thing to do! Instead, keep the account open and have a small amount of activity on it that is paid off each month.
Here's why: One factor that determines your credit score is the length of credit history, which makes up about 15% of your total score. People with credit scores over 800 typically hold at least three credit cards (with low balances), which they've had open for seven years or more.
Rather than closing these accounts, it is best to work toward paying them off, and then keep the accounts open with a small amount of activity being charged (and paid off) each month. This can be as simple as setting up a utility or cell phone bill to be automatically charged each month by that card.
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