The Right Way to Build Credit
By Deshundra Jefferson
Good credit is an essential building block for a solid financial future.
It may take a little bit of work, but knowing the basics of building credit will right your course, according to King. King founded the FMK Credit Education Center, Inc. in 1991 to help consumers better understand and manage their credit. King previously worked for Equifax, one of the nation’s three main credit reporting bureaus, where she learned the secrets behind the credit scoring system.
Know Your Score
Credit scores are used to determine your creditworthiness, i.e. how likely you are to pay back a debt. FICO scores, created by Fair Isaac Corporation, are the most commonly used credit score, with an estimated 90 percent of lenders relying on these scores to determine whether or not to extend credit to a particular consumer. FICO scores range from 300 to 850, but a “good” credit score usually falls between 670-739, according to MyFICO.com.
FICO scores are based on a consumer’s credit report as maintained by the three major credit bureaus: Equifax, Experian, and Transunion. Each of these agencies have their own numerical scoring model so your credit scores may differ slightly between each of the different agencies simply because they have different information in their files concerning your credit history.
While the difference may be only a few points, King recommends that consumers check their credit yearly for any discrepancies.
“A lot of times you might see something that may be yours, but the information has been reported incorrectly. For example, if it’s a debt that was paid off a long time ago, and you don’t have an outstanding balance, the credit bureaus should remove it.”
Building Good Credit
If you have an established credit history, the first step is to check your report to see if there are not any errors on your report. As King noted, you want to make sure that your credit report is fair and accurate.
If you have bad credit or no credit, King suggests that you consider applying for a secured credit card or a secured loan. Both secured credit cards and secured loans require you to put down a deposit, as security, for a line of credit.
If you are able to secure a co-signer for a small loan, that would also help you build your own credit history. But be aware that if you miss a payment, it will negatively impact your
co-signer as well.
And of course, be careful of taking on more debt than you can handle. That department credit card may seem harmless — and who can resist an extra 20 percent off from opening a new credit card — but easy credit may prompt you to reach for your credit cards when you don’t have enough cash on hand.
Deshundra Jefferson is a personal finance writer whose work has been published by CNN/Money.com (now CNN/Business), and AP. She lives in Northern Virginia with her family.