Building, Improving, and Managing Credit
Building, Improving, and Managing Credit
Building, Improving, and Managing Credit
Unless you’ve lived under a rock, you’ve heard of credit. But do you really understand it? Do you know how to build it? Do you know how to improve it? Here are some tips to help you to build, manage or improve your credit.
Building Credit
To build credit you will need to be approved for a loan that you then demonstrate that you can pay back responsibly. Typically, the easiest type of credit to be approved for is a credit card – such as from Visa, Mastercard, Discover, or American Express.
The secured credit card option
However, if you apply for a credit card account and get denied, another approach to consider is what’s called a secured credit card. The way a secured card works is the bank requires a deposit of a certain amount in a savings account to open the credit card account. For example, let’s say that deposit amount is $500. The bank would then issue you a credit card account with a $500 credit limit. That way the bank is protected if the borrower does not pay them back. Typically, after several months of using the card responsibly, the bank may remove the deposit requirement, and convert the account to a regular credit card.
Improving Credit
In order to improve your credit score, you need to use the credit you have responsibly. For example, what exactly does it mean to use a credit card responsibly? The most important habit is to pay at least the minimum payment on time every month. The second important concept is what is called credit utilization – which refers to the percentage of your total credit you owe. For example, if you have a credit card with a $500 limit, and have a balance of $200, you credit utilization percentage is $200/$500, or 40%. A helpful guideline is to keep your utilization percentage below 30% to help raise your credit score. A higher utilization percentage – especially as you approach 100% - will lower your credit score.
Managing Credit
The longer you have experience with raising your credit score by responsibly using your new credit card, you may receive offers for other credit card accounts. You may also be able to take on other forms of debt, such as a vehicle loan or a mortgage to finance the purchase of a home. Be sure to take on additional credit responsibly – always making sure you can afford to pay back what you borrow.
Durham Tech Community, for more personal finance advice or tips, email me at chapmanl@durhamtech.edu
Larry is the Financial Coach at Durham Tech, providing individual coaching services and information to the students and employees of the Durham Tech community.