Your credit can affect your long-term financial goals. And people can use credit, or their access to credit, in different ways. It takes having credit to get credit and credit is a crucial part to buying a new home, finding a place to rent, or purchasing a new car. You have to start somewhere!
Even if you’re financially responsible, life’s unpredictable nature can sometimes catch you off guard, at times making it easy to fall into debt. Understanding credit can guide you your whole life.
Loans and credit cards are the types of credit people use most often. Loans, which let you borrow a lump sum of money, have a longer history. But credit cards, which give you revolving access to a fixed amount of money, called your credit limit, have become a way of life for a majority of people. Revolving access means that as soon as you repay an amount you’ve borrowed, you can use it again.
There are three big components to a good credit score: establishing a healthy mix of loans and revolving accounts over time, paying bills on time (every time), and avoiding high levels of debt.
How long does it take to build a good credit score?
The first step—building credit by establishing a healthy mix of loans and revolving accounts—is often the trickiest, because it’s a catch-22: You need to get credit before you have a credit history, but it’s difficult to get credit before you have a credit history!
There are several ways to establish credit for the first time, but it’s arguably easier to do when you’re young and either in college or still dependent on your parents. For example, you can get a credit builder loan with AAGCU. Our credit builder loans are here to help you establish credit and raise your credit score. Benefits to a credit builder loan include establishing credit and/or improve your credit score, credit counseling if desired, a friendly and knowledgeable staff, and eventually a strong credit score which will help you qualify for other loans when you need them!
Once you have one open account, it becomes easier to get additional accounts after about six months. Over time, you’ll get the best credit score when you have at least one or two credit cards and one or two loans (like an auto loan). That said, having more accounts is not necessarily better. Take your time building. This doesn’t happen overnight!
Which brings us to a key part of credit scoring: time. It typically takes three years of responsible credit use to have an average credit score in the mid to high 600s and up to seven years to develop a very good credit score of 700 or more.
Now there are things you can do during that time that can both help or hurt your credit score.
Why is paying your bills on time so important?
Payment history can account for nearly 35% of your credit score, more than any other factor. Making your payments consistently and on-time is the number one things you can do to build a good credit score.
Nothing can wreck your credit score faster than failing to pay your bills on time. The longer you take to pay them (and the more often you are late), the lower your credit score will fall.
How does debt affect your credit score?
Too much debt is bad for your finances and it’s bad for your credit score. Your overall debt level accounts for 30% of your credit score.
Credit-card utilization (meaning how much of a balance you carry in relation to your credit limit) affects your credit score. The higher your combined balances in relation to your combined credit limits, the more your credit score will suffer. For the best credit score, you want to keep this “utilization ratio” as low as possible.
Keep in mind that even if you pay your balance in full every month, your credit report reflects your card balance on the last day of your billing cycle. If you frequently use most of your available credit each month, your credit score will suffer even though you may be paying the balance in full every time. You can avoid this by paying off most of your balance on the day before your credit card billing statement closes. Your credit report will show a $0 balance—or close to it.
Other factors affecting your credit score
Other factors that affect your credit score include the average age of your credit accounts (credit file age), account diversity, recent credit inquiries, and public records. With the exception of public records, each of these factors make up about 10 to 15% of your credit score.
Try to limit credit applications (whether loans or inquiries or credit cards), to no more than two every six months. Checking your own credit score is known as a “soft inquiry” and does not count toward this limit. Too many credit applications in a short period of time can cause your score to go down because it looks like you are desperate for credit. There’s an exception for credit inquires of the same nature that indicate you are rate shopping. If these inquiries are within a month or so of each other, they will generally only be counted as one inquiry.
Public records are one thing you definitely do not want on your credit report, because it usually means that someone has taken you to court over a debt. Many, like tax liens or credit judgments, can drag your score down for years.
Want to learn more? We have a Financial Resources Center to help get your questions answered!
Give us a call to inquire about your options to build your credit with Alaska Air Group Credit Union.
You ca also watch our recorded Understanding Credit Seminar!