Building Credit

Understanding what credit is and how your credit can be improved is a crucial step toward reaching your financial goals. Your creditworthiness is a measure of factors that may affect your ability to repay money given on credit. Ratings and scores commonly consider how you’ve repaid previous loans, any outstanding debt, and other financial history.

Creditworthiness tends to be dynamic and may change over time according to how much debt you take on, how you manage your bills or as time passes. Do not trust “fast fixes” to improve your credit score. 

To build credit wisely, learn some of the factors that commonly affect credit and how you can manage them to strengthen your credit: 

1. Character. A lender may decide how reliable you are to repay debt based on your credit history. Lenders are likely to look at items like your credit use, bill payment, residential history, and sometimes, how long you’ve worked at your current workplace. 

One of the most effective ways to strengthen your credit reliability is to make payments on time. Some credit card companies offer free, automatic alerts to help you keep track of your balances, payment due dates, payment history and purchase activity.  

2. Capital. Many times, a lender will want to know if you have valuable assets such as real estate, personal property, investments or savings with which to repay debt if income is unavailable.

Learn the best ways to save for your goals in order to gain these valuable assets and potentially boost your credit. 

3. Capacity. This refers to your ability to pay off debt. Lenders will often look to see if you have been working regularly so you receive regular income to support your particular credit use. They may look at your salary, check whether you have pre-existing loans or debts, and assess whether you have family members who depend on your earnings.

4. Collateral. A lender may require you to put up some form of collateral — a property or asset — for certain types of loans like auto loans. When you take out a car loan the vehicle you buy is often used as collateral for the loan.

5. Conditions. This refers to the condition of the economy and how it may affect your ability to repay the loan.

To ensure you aren’t taking on more than you can pay off, it can be good to follow the 20-10 Rule. This rule of thumb suggests you avoid borrowing more than 20 percent of your annual net income on all your loans (not including mortgage loans), and that payments on those loans do not exceed 10 percent of your monthly net income. 

Research Credit-Building Options
If you’re looking to rebuild damaged credit, research whether secured credit cards, credit-builder loans, or similar options are available to you. These options may require security deposits and might have strict limitations on how much you can borrow.