How to Build Your Credit Rating

Your credit score has a huge effect on what financial services you have access to, and building it can be hard. But there are ways it can be done.

Credit: that three-number figure attached to you that decides whether you qualify for, well, credit. Whether you’re applying for a mortgage, a car loan, or in-store financing, your credit rating is one of the biggest factors in whether or not you’ll be approved. Credit rating is really just a number that indicates how responsible you are with the credit you have been given - whether you’re paying off your debts in full early, racking up a large amount of debt and relying on minimum payments, or missing payments altogether. To make your credit score higher, and therefore indicative of responsible credit usage, you need to use credit responsibly. That means making minimum - at the very least - payments on time, avoiding racking up excessively high balances for long periods of time, and keeping your accounts open. That last point is especially important, as accounts that are open for under six-months are not reported to credit bureaus.

The first step to building - or repairing - your credit is to make sure that at the very least it isn’t getting worse. Even though they might not be considered ‘credit’, the monthly bills that are in your name contribute to your credit rating. Whether it’s your phone bill, utilities, or your internet bill, missing a payment can and will hurt your credit rating. So before even thinking about building your credit, make sure that you have this aspect of your finances under control; it’s much easier to build your credit when you aren’t simultaneously undercutting your efforts by paying your bills after they’re due. Additionally, avoid applying for multiple credit cards or loans at one time - lenders tend to see this as a warning sign that an applicant is planning to take on a large amount of debt, and therefore it does hurt your credit score.

Once you’ve ensured that you’re paying all of your bills on time, it’s time to start building your credit rating. Assuming that you have a credit card, use it! Whether it’s for day-to-day purchases or large expenses, as long as you aren’t carrying a significant (over 30%) balance, and are making payments on or before the deadline, over time this will make your credit rating go up. However, if you have zero - or imperfect - credit history and can’t get approved for financing, a secured loan may be your best option. A secured loan is just that: a loan that is ‘secured’ by some kind of collateral. While there are plenty of unsecured loans, such as a normal credit card or student loans, secured loans are just as, if not more common. For example, mortgages are a type of secured loan. A mortgage is a loan that is given to assist consumers with affording a home, and the property itself is used as collateral in the event that payments are missed or the loan is defaulted on. Secured loans are often the best option for individuals with no credit history, or a lower credit score, due to their low-risk nature to the lender. Since the loan is secured by collateral, they can be easier to get approved for, and secured loans affect your credit score in the exact same way as unsecured loans. This means that you can build your credit rating just as effectively, but much more accessibly.

The secured loan that can be most accessible to consumers is what is called a ‘secured credit card’. This is a credit card that requires you to make a cash deposit up-front as collateral, and the limit on the card will most often be the same as that initial deposit. The reason for the collateral deposit is to insure the card provider in case you miss any payments - think of it like a damage deposit for an apartment. In terms of affecting your credit rating, a secured card functions exactly the same as a normal, unsecured credit card. All you have to do is use the card, make payments on time, and you’ll steadily build your credit rating until you can qualify for an unsecured card. Secured credit cards are especially excellent for anyone who has never had a credit card before, as you have essentially already paid-off the maximum balance of the card before using it due to the deposit. This allows you to learn how to use a credit card responsibly, without the danger of over-leveraging yourself. Secured credit cards still need to be used responsibly, as all credit options must, but they are an excellent tool for learning how to use credit appropriately.

Two other potential options for building your credit include applying for a credit card with a cosigner, or being named as an authorized user on someone else’s credit card. These two avenues are similar, but differ in a few key ways. Applying for a credit card with a cosigner is similar to a secured credit card, with the difference being that instead of a cash deposit as collateral, ultimate responsible for ensuring that any credit card debt is paid falls to the cosigner. As with a secured credit card, this gives the lender more confidence in giving credit to a consumer with a short or weak credit history, and allows that individual to build their credit rating. Becoming an authorized user on a close friend or relative’s credit card is another option. Instead of having a card in your own name, another individual will add you to their card as an authorized user, meaning you can make purchases with their credit card. Assuming that all payments are made on time, an authorized user can expect to see small increases in their own credit score over time. However, before going through the process of becoming an authorized user, make sure that whichever financial institution that is providing the card also reports authorized users to credit bureaus, otherwise you won’t see any change in your credit rating.

Another more long-term way you can build or rebuild your credit is with a credit builder loan. These work differently than a standard loan, in that when you’re approved you don’t have access to the funds right away. Instead, the funds are placed into a secure account by the financial institution, and as with another loan you make regular payments. Once you have paid off the loan in full, the institution then releases the funds to you. The benefit of a credit builder loan is that it - as the name implies - builds your credit rating, as the payments are reported to the major credit bureaus in the same way as any other loan. Additionally, once you’ve paid it off you’ll receive a fairly large amount of money, depending on the principal amount of the loan. While there is a very real cost associated with credit builder loans in the form of the interest payments, due to the exceptionally low-risk to financial institutions it can be very easy to get approved, even without a strong credit rating.

Credit can be hard to understand at first, but improving your score really just takes consistent responsibility with the credit you are given. By paying your bills on time, ensuring that you don’t carry a significant balance for a long period of time, and taking some of the previously outlined steps, you can put yourself on the path to a healthy credit score. And of course, having a higher credit score does help when it comes to applying for a mortgage, but there are other factors that influence your application. If you are unsure whether or not your credit is good enough to get approved for a mortgage, you can always contact a member of the Essential Mortgage team. They will analyze your financial situation, and give you an idea of what kind of loan you can qualify for. You might just be pleasantly surprised!

All information herein subject to change and all offers mentioned are subject to change and OAC.

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