Buying a vehicle or applying for a loan can be super exciting because it means big things are happening! But the loan process can be confusing, intimidating, and seem impossible. This is especially true if you don’t have a credit score or it is lower than you would like.
What is a credit score and why is it important?
A credit score is a formula that companies use to predict how likely a person is to pay back a loan. This formula takes into consideration things such as a person’s length of credit history, bill-paying history, current debt, number and type of loan accounts, how much of their available credit the person is using, and more.
Companies in the US use credit scores to decide on whether to approve an applicant for a credit card, mortgage, auto loan, etc. and those with better credit scores get more favorable terms and lower interest rates. The higher the score, the better.
If you are young, or new to the US, you might not have a credit score at all. Or maybe you have made some mistakes in the past and your score isn’t as high as you’d like it to be. Then it’s time to take some steps to build your credit.
5 Ways to Build Your Credit Score
- Get a credit-builder loan. Typically, with this type of loan, the lender holds the money you borrow in an account and does not release it until you repay the loan. Savings Club is perfect for this! We report each monthly payment to the credit bureaus, so taking part in Savings Club is a perfect way to not only purchase a vehicle but build up your credit score along the way.
- Become an Authorized User. Ask a family member with good credit and payment history to add you as an Authorized User on their credit card. When someone lists you as an Authorized User on a credit card, that card’s payment history is added to your credit history. This can give your credit score a boost. Best of all, you don’t need to use or even have access to the credit card at all to benefit.
- Consistent Payments. Always make your payments on time and pay at least the minimum amount. Making loan and credit card payments on time is the most important factor in building your credit score.
- Credit Card Utilization. Try to keep your credit card utilization below 30%. So, for example, if you have a card with a $1000.00 limit, keep your balance on that card below $300. Keeping your credit card utilization below 30% gives your score a boost.
- Credit Card Accounts. Keep your credit card accounts open! It may seem counterintuitive, but keep them open even if you don’t plan on using them. Closed accounts are no longer factored into your average account age and can lower that number, which you don’t want.
Having a good credit score is a major factor in getting a loan in the US and it’s daunting to figure out how to build or improve one. While there is no quick-fix solution, following these steps will help you build your credit score and make it easier for you to get a loan in the future.