Credit 101 – How to Repair & Build Your Credit
Credit can be confusing. Today, more than ever, it is critical to know what your score is and where you stand. Having poor credit can mean limited financing opportunities and paying more in interest due to higher rates.
There are also no shortcuts when it comes to building your credit. It takes practically no time to damage your credit and far longer to rebuild your score. By taking positive steps now you can position yourself for future success.
Below you will find the basics on how credit is scored and reported, along with action steps on how to improve your score.
What determines your credit score?
- 35% Payment History – Your account repayment history including any delinquencies, collections, and public records. How well you repay your debts is the biggest driver of your score.
- 30% Outstanding Amounts Owed – This includes how much you owe on your accounts and the amount of available credit you are utilizing. Having balances above 30% of your total credit limit on credit cards or other lines of credit will weigh down your score. How much debt you have is the second biggest driver of your score.
- 15% Length of Credit History – This measures how long ago you opened your credit accounts. In general, the longer the credit history, the better.
- 10% New Credit Opened – Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
- 10% Types of Credit in Use – The mix of accounts you have, such as revolving (credit cards), home mortgages and installment loans (e.g. car loans).
Where Do I Go From Here?
Your first step is to diagnose and find out where you stand. Next you should clean up and repair any adverse or negative items affecting your score, and then rebuild your credit with a strong usage and payment history. Credit building takes time and requires timely payments, which are then reported to the three credit bureaus. From there, you will need to maintain your good payment habits and keep going in the right direction. Credit building is a marathon, not a sprint.
Steps for Credit Repair and Rebuilding
- Diagnose – Find out where you stand by pulling your report and checking for any errors. Credit Karma now offers free services to view your scores, and you can request a free copy of your credit report from the three major bureaus at AnnualCreditReport.com. You can also attend a credit counseling seminar at Mercy Corps Northwest (see We Can Help below).
- Repair – Bring delinquent accounts current and pay off any collections or other outstanding negative items bringing down your score. Dispute any inaccurate information being reported.
- Pay on time – on-time payments are the biggest driver of your score, so set up automatic payments to pay your bills on time. Get current and stay current!
- Pay it down – reduce your debt load. The amount of debt you owe is the second biggest driver of your score. Research and utilize a debt repayment strategy to reduce balances on your loans and pay down debt.
- Maintain – Keep up the good work! Remember, it is easier to damage than to rebuild your score. Keep your monthly debt within your means and make all payments on time.
Remaining Tips and Common Mistakes
- Credit cards are fine to use, but avoid carrying high balances, since these often have high rates of interest. Remember to shoot for less than 30% of your total credit limit.
- Having fewer accounts is better – if you have a surplus of accounts, there is no need to close them, just pay them off. 1 or 2 credit cards is sufficient.
- Credit building takes time – the longer your bad history is behind you, the better. Remember that credit building is a marathon, not a sprint.
- Use debt only as needed – if you don’t need it, don’t use it. Use credit only as a tool to move your financial well-being forward.
We Can Help
Need to build your credit? At Mercy Corps NW we have services available to get you closer to your credit goal.
- Sign up for credit counseling through MCNW to find out where you stand. You’ll get your credit report and view your score and history.
- Learn about how credit can impact your budget by seeing how your interest rate can lead to increased payments and greater interest paid over the life of a loan.
- Are you a Foundations or IDA graduate? You are pre-approved for a small credit-builder loan for your business to build your personal credit. Access an initial $1,000 over 6-12 months. Then, once repaid, you are eligible for an additional loan of $2,500.
- Lastly, we offer small business loans up to $20,000 for startups and up to $50,000 for existing businesses. All of our business loans are reported to the three credit bureaus to build your credit history.