Financial Health Part 2: Get Your Credit in Shape

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Being fiscally fit is just as important as staying physically fit, and building up your credit score is a vital aspect of financial fitness.

Having good credit can benefit you in numerous ways. You’re more likely to be approved when you apply for a loan because companies will view you as a good investment. You may qualify for a lower interest rate if you have a strong credit history. Good credit can also earn you favorable balance transfer terms.

If you don’t have good credit, don’t worry. It’s not too late. There are steps you can take to improve your credit score. We also have some tips on how to keep your good credit from falling into bad credit territory.

What is Credit?

When you were in school, you received test scores that informed your parents of how well you were doing in class. Credit scores are similar to test scores. Credit scores inform lenders how much of a risk you pose if they give you a loan.

If you pay your bills on time and have a good history of managing healthy debt, you’ll be on track to earn a good credit score. However, if you’re frequently charged late fees and have credit card companies chasing you down for payments, you’ll score poorly.

Lenders view people with bad credit as risks. They’re uncertain whether those people will actually pay back the debt they incur and identify them as not worth lending to. In the best scenario, a loan to someone with a poor credit rating may carry a much higher interest rate.

Before working on your credit score, it’s important to know where you stand by requesting a free copy of your credit report. A credit report contains information collected by the three credit bureaus (Experian, Equifax, and TransUnion). This data is used by credit scoring companies like FICO® to calculate your credit score. For example, a credit report would include dates when you opened a credit card or took out another loan. The only source of your free credit report that is authorized by the federal government is

Learn what factors make up your credit score here.

How to Increase Your Credit Score

Some common scenarios where you’ll need to provide credit history include purchasing a car or home and getting your own cell phone plan. What can be tricky is that oftentimes, to be approved for credit or to receive favorable interest rates, you need to already have good credit. This is something that many college students struggle with.

While student loans will show up on your credit report and eventually help build credit, until you start paying them off, there’s no payment history to report – meaning you won’t see any big boost to your score.

One way for college students and others to build credit is by applying for a secured credit card. A secured credit card works similarly to a regular credit card but is “secured” with your own money, also known as “collateral.” This means that a separate account is set up to hold your own cash. For most secured cards, the secured (or pledged) amount equals the line of credit on the secured card (typically $500-$2,500). However, PSECU has a member-friendly secured card that has a sliding scale of collateral that is based on your approved credit limit.

Secured cards are a good option for those with poor or no credit. The lender is more likely to extend credit to you because in the event of a default, they can exercise their right to pull the money owed for the account. This makes it less risky for them to lend to you. Of course, your goal should be to never miss a payment. Not making a payment on a secured credit card can seriously hurt your credit. Paying regularly on a secured credit card can increase your credibility with lenders and help to boost your credit score.

Regardless of whether you work to build up your credit score through loans or a credit card, be sure to make your payments on time. Don’t draw on them beyond your means. You will ruin any good credit you’ve built if you default on a loan or fail to make consistent payments.

How to Rebuild Credit

Fortunately, it’s possible to rebuild your credit over time. You can move toward rebuilding your credit by following these tips:

  • Pay your bills on time. Your credit takes a hit when you pay bills late. Look into automatic payments or set up reminders to help you stay on track.

  • Don’t open or close credit card accounts unnecessarily. Opening several new accounts can hurt your credit. It makes you appear riskier to lenders. Closing credit card accounts can damage your credit, too. Lenders like to see long histories of card ownership so they can look at how consistent your payments have been. That said, if an old card has an annual fee, it may be worth the hit to your credit to close the account and save the money every year.

  • Eliminate your debt. The less debt you have, the less risk you pose to lenders. After paying your bills and putting at least a small amount in your savings, put extra money toward paying down debt, as this will also decrease costly interest payments.

What Can Hurt Your Credit Score

Whether your credit is good or bad, you should continue to monitor it. You may not even realize that certain behaviors can contribute to a lower credit score. Make sure you avoid the following:

  • Opening several new credit card accounts. The more potential debt you accumulate in a short period of time, the riskier you become to lenders.

  • Hitting the limits on your credit card. If you max out your cards regularly, you run the risk of going over your limit and accumulating debt you can’t pay off on time. It’s best to stay at the lower end of your credit limit.

How Long Does It Take to Improve a Credit Score?

If you have a low credit score, you may be waiting impatiently to get it back to an acceptable level.

Your recovery depends on how serious your credit issues have been. If you went through bankruptcy, it can take up to seven years for your score to recover. However, if you miss a payment and don’t have any other issues, you could rebound much sooner. Make sure you’re focused on staying current with your bill payments to make your credit score rise as quickly as possible.

Also keep in mind that you may see your credit score dip for a few months if you apply for a lot of new credit in a short amount of time, get a new credit card or loan, or close a credit card account.

If you follow these tips, you can establish good credit as a young person or rebuild credit that has fallen over time. Remember, just like getting in shape, it requires time and persistence to build good credit, and it’s well worth the end result. Applying for our Secured Visa Card – no application fee and no annual fee plus, depending on your requested credit limit, you might need less money as collateral.

This is part two of a four-part series on how to get financially fit. Part three will help you set financial goals. Find more money management tips and resources on our WalletWorks page.

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