Four Key Ways to Build Your Credit
If you're like many Americans, you may have a few dents and dings on your credit report. As of 2020, around one in five adults has either a "fair" or "poor" credit score, which can impact their ability to qualify for a loan, rent an apartment, or even get a new job.1 And if you've largely avoided debt as an adult, you may find you have a similar problem—a sparse or nonexistent credit history can reduce your score as well.[1]
Below are four ways you can try to build your credit, improve your credit score, and prove your financial trustworthiness to lenders.
Check and Correct Your Credit Report
The Federal Trade Commission (FTC) indicates that 20 percent of Americans have at least one error on their credit reports.2 If this error is a damaging one (like a late payment, foreclosure or bankruptcy, or an inaccurate listing of accounts), it can severely hamper your credit score.[2] In other cases, viewing your credit report may tip you off that you've been the victim of identity theft![3]
By accessing your free copy of your annual credit report and checking it over carefully, you can ensure that it is an adequate reflection of your credit history. If you do spot any mistakes or omissions, you can dispute this information by contacting the credit reporting agency and the creditor that made the report.[4]
Avoid Closing Old Accounts (or Opening Too Many New Ones)
One factor that goes into your credit score is your "average age of accounts."[5] This is designed to measure your creditworthiness by showing you have a long history of responsibly using credit.
But taking out too many new credit accounts at once can significantly reduce this average age, and closing your older accounts can compound this issue. Try to avoid closing old accounts whenever possible, and be judicious when opening new credit accounts.
Take Advantage of Authorized Use Agreements and Secured Credit Cards if Needed
If you're just starting out or are rebuilding your credit after a repossession, foreclosure, or bankruptcy, you may find it tough to qualify for many types of credit. In these situations, you can begin improving your credit score by being added as an authorized user on another person's credit card—as long as this person has good credit and pays their bills on time.[6]
You can also take out a secured credit card, which requires a deposit and functions more like a debit card—if you don't have enough on your card to afford the purchase, the card will be declined.[7] This mechanism can help keep you from going over your credit limit while also providing a positive monthly report to the three credit reporting bureaus.[8]
Set up Autopay to Avoid Late Payments
One of the most damaging entries on a credit report is the dreaded late payment. This usually involves more than just forgetting to drop a check in the mail until a few days after its due date; in most cases, a lender or creditor won't report a payment as late until it's at least 30 days past due.3
To lenders, a late payment on a borrower's credit report can be the first indication of financial trouble that may lead to foreclosure, bankruptcy, or wage garnishment.[9] By setting up automatic payments, you can reduce the risk that a particular payment may fall between the cracks and wind up as a black mark on your credit.[10]
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
1 https://www.badcredit.org/how-to/bad-credit-statistics/
2 https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/
3 https://www.equifax.com/personal/education/credit/report/when-late-credit-card-payments-post/
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[1] https://www.cnbc.com/select/how-to-build-credit-with-no-credit-history/
[2] https://www.nerdwallet.com/article/finance/dispute-credit-report
[3] https://www.annualcreditreport.com/protectYourIdentity.action
[4] https://www.consumer.ftc.gov/articles/0155-free-credit-reports
[5] https://www.myfico.com/credit-education/credit-scores/length-of-credit-history
[6] https://www.experian.com/blogs/ask-experian/will-being-an-authorized-user-help-my-credit/
[7] https://www.experian.com/blogs/ask-experian/secured-credit-card-will-it-help-your-credit/
[8] https://www.experian.com/blogs/ask-experian/secured-credit-card-will-it-help-your-credit/
[9] https://www.creditkarma.com/advice/i/what-does-derogatory-mean
[10] https://www.experian.com/blogs/ask-experian/can-automatic-bill-payments-help-my-credit-score/