Introduction
Establishing credit for the first time can be very daunting especially if one has no clue on how credit works. Whether you are a beginner in the financial world, or you have never used credit products before, building a credit history is crucial for getting loans, receiving favorable interest rates, and opening the door to better financial prospects. In Middlesex Healthcare Federal Credit Union, we know how important it is to help members create and sustain a good credit standing. In this guide, we will explain the process of how you can manage your credit responsibly and the way you can benefit from this.
- Understand How Credit Works
In order to understand the steps of how one can build credit, it is necessary to explain how the credit system functions. Credit score refers to the numerical expression of creditworthiness and it ranges from 300 to 850. This score is derived from five factors: payment history, the amount of credit used, the age of the credit history, the number of credit cards and others.
Banks, including MHCFCU, use this score to decide if you qualify for loans and the rate of interest you are going to be charged. The higher the score, the better the terms that you will receive. Starting a credit from scratch requires one to demonstrate to the creditors that one has a capacity of managing his or her financial resources in the future.
- Start with a Secured Credit Card
Another popular method of how to establish credit from scratch is to get a secured credit card. A secured credit card is one that is backed by a cash deposit which acts as the credit limit. For instance, if you deposit $ 500, this amount is considered as your credit limit.
Middlesex Healthcare FCU is pleased to provide secured credit cards which are aimed at helping members develop or re-establish credit. The great thing is that your activity is supposed to be reported to the major credit bureaus to help you begin establishing good credit history.
When using a secured credit card, remember to:
- Keep your credit utilization low (ideally below 30% of your limit).
- Pay off your balance in full each month to avoid interest charges.
- Never miss a payment, as this could negatively impact your credit score.
- Become an Authorized User on Someone Else’s Account
Another strategy to build credit from scratch is to become an authorized user on someone else’s credit card account, such as a parent or spouse. As an authorized user, you can benefit from the primary cardholder’s credit history without being financially responsible for the account.
This approach works best if the primary cardholder has a strong credit history and consistently makes on-time payments. Many MHCFCU members have successfully used this method to give their credit a boost when they were just starting out.
However, it’s essential to ensure that both parties are on the same page regarding the use of the card, as any negative activity on the account could affect your credit as well.
- Pay All Bills on Time
Your payment history is one of the most significant factors affecting your credit score, accounting for 35% of the total score. Even if you don’t have any credit cards or loans, paying your regular bills—such as rent, utilities, and phone bills—on time can help establish your ability to meet financial obligations.
While these payments are not always reported to the credit bureaus, some services can help you report them, which can contribute to building your credit. Additionally, any missed payments could end up with collections, which would hurt your credit score, so it’s essential to stay current on all your financial obligations.
- Limit New Credit Applications
Applying for too much credit in a short period can hurt your credit score. Each time you apply for a loan or credit card, a hard inquiry is placed on your credit report. While one or two inquiries won’t have a huge impact, multiple applications within a short time frame can lower your score.
The other thing that one needs to know when constructing credit is that one should apply for credit at the right time and place. Finally, for MHCFCU members, the advice given is to only apply for credit when you really need it. Many inquiries can make lenders reluctant to grant you credit in the future, especially when your credit profile is still developing.
- Diversify Your Credit
Having a combination of different types of credit is good for your credit score. Creditors prefer to find out that you are capable of handling different types of credit well, such as credit cards, personal loans, or auto loans.
If you only have one credit account, then consider getting another type of credit in your credit report–where it is financially wise to do so. For instance, if you have been in the secured credit card for some time, and you have a good record in your credit report, you can apply for a standard credit card, an unsecured credit card, or a small personal credit from MHCFCU.
The use of more than one type of credit can help show lenders that one is capable of handling different types of credits and is likely to raise the credit score.
Bottom Line
The process of establishing credit history is gradual but relatively unproblematic; the benefits are very valuable. Having a good credit rating means that one is privileged to better credit products, low interest rates and good credit facilities. Being a member of Middlesex Healthcare FCU, you have all the resources and instruments required to create and develop your credit profile successfully. No matter if you decide to use a secured credit card, a credit-builder loan, or any other way, using the instructions provided in this guide will help you reach your financial objectives and build a strong financial future.
For more personalized guidance on building credit, contact Middlesex Healthcare FCU’s member services today. We’re here to help you every step of the way.
