The older you get, the bigger the things you need to buy.
And if you want to buy big things, like cars or houses or appliances (oh my!), you need to know how to build credit. Why? Because unless you have a lot of money sitting around, you’ll probably need to get a loan to pay for them. For a low rate on your loan (a.k.a.: lower monthly payments), you need a higher credit score. The problem is, you’re often expected to already have it in order to get it. In a situation like the chicken and the egg, where are you supposed to start? The answer is not as complicated as you think.
All you need to know is how to increase your credit score
The easiest way? Get a credit card. Now, don’t think you just sign up and stop there. You do have to use your credit card regularly, and you also have to pay the credit card bill in order to get a credit score. Be careful - you don’t want to get into credit card debt, as the high interest in paying back that debt is deadly.
However, so long as you treat your credit card more like a debit card you should be okay: only spend as much money as you actually have in the bank, rather than the amount the credit card company will let you borrow. For example, your credit card might have a spending limit of $2,000, but if you only have $500 in your bank account, don’t spend more than $500.
Some good options on what to use your credit card for are a monthly utility bill or streaming service. These make it easy to know how much of your credit line will be used each month, so you always know how much you need to pay toward your card. Pay the full balance off every month, and you’ll avoid paying that dreaded interest. Your payments will still report to your credit each month, giving you positive credit history and increasing your score.
You might still feel like a credit card is too much of a temptation
Fear not, for there are other options to start small with! Instead of taking on dangerous high-interest loans or worrying about going overboard with a normal credit card, start with a secured credit card.
You aren’t risking anything, because you “secure” the limit of the card with your own money. Say you have that same $500 in your account. Rather than keeping yourself in check and resisting spending more on your own, the $500 will be put on hold and you’ll get a secured card that has a limit of $500. Once your credit score has been built up, you pay off the card, and the hold on your $500 is released.
It’s no wonder a secured credit card is such a popular tool for credit! Even if you feel you’ve already messed up and your credit score is painfully low, a secured card can help you build it back up.
A good credit score will lead to an easier life
What is a good credit score? In a range of 300-850, a score of 680 or above is generally considered good. If you’re buying a car for $10,000, and a lower score earned you an interest rate of 10%, with a term of 48 months you could end up paying $12,192 overall.
If the higher score gets you an interest rate of 7%, you would pay $11,472 for that same car. Now consider how much of a different your credit score can make in the purchase of a house!
No matter what stage of life you’re in, good credit matters
Paying off a loan on a big-ticket item could go from being a gentle stroll up a hill to an exhausting climb up a mountain. So don’t wait! You have enough to deal with every day - improve your credit by handling your credit cards responsibly. Get started on the right path today so your journey is a smoother one.
Start your credit journey with a credit card from SunWest that suits your needs.
February 25, 2021
Published by SunWest Credit Union
