December 7, 2020

TAGGED AS: Credit 101

Most people appreciate the importance of financial wellness. Money worries can cause major stress, but understanding how to manage your money, live within your means, and stay relatively debt-free can have a positive effect on your emotional and physical well-being. 

Financial wellness includes building and maintaining good credit, which is important for more than just borrowing money. Here’s why good credit matters for your finances and your peace of mind, as well as how you can attain a positive rating:

Good Credit Matters

Solid credit – contained within a credit report and reflected in your credit score – demonstrates your financial responsibility. It affects your ability to:

  • Secure home, auto, and educational loans 
  • Qualify for a credit card
  • Obtain lower interest rates on loans
  • Receive favorable rates on insurance policies
  • In some cases, get hired for a job

With so much of your financial wellness at stake, you should have a general idea of your credit history and, in particular, what your credit score is and how it’s calculated. 

Credit Score Basics

A credit score is a ranking between 300 and 850 that fluctuates based on information found in your credit report. A score of 670 to 739 is considered good and over 740 is excellent. A variety of weighted factors determine your credit score:

  • Payment history (do you pay your bills on time?): 35 percent
  • Credit utilization (how much of your available credit do you use?): 30 percent
  • Credit length (how long have you had credit?): 15 percent
  • New credit accounts (have you opened many new accounts recently?): 10 percent
  • Credit mix (the types of loans and accounts you have): 10 percent

Your credit history follows you through your life so it’s beneficial to build good credit early. Good financial habits can help you get there.

Getting Started

To establish a credit history, you first need to apply for some type of loan. You’re not born with a credit score and you won’t have a credit history until a credit account is reported to one of the three credit bureaus: Equifax, Experian, or TransUnion.

A credit card is often the first step for many to start building credit. There are different types of credit cards available, including:

  • A Visa or Mastercard issued through a financial institution
  • Cards in which the issuer and the network are the same (e.g., American Express, Discover)
  • A Visa or Mastercard issued through a department store (e.g., Best Buy, Target, Macy’s)
  • Secured credit cards, which require you to provide a refundable deposit that becomes your card’s credit limit

Once you have a credit card, you can use it to make purchases or pay recurring bills. You can also add it to your mobile wallet apps such as PayPal, Apple Pay, and Google Pay. 

If you aren’t interested in a credit card, another way to establish credit is with an auto loan, a starter loan, or a personal loan. Even a small loan with a fixed monthly payment will help you establish credit.

Building Good Credit

To maintain a good credit score, pay your bills on time. It’s best to pay off your balance in full each month. However, if you must carry a balance, it’s a good practice to have a plan to pay it off within a short period of time. This demonstrates that you can handle credit responsibly.

However, be careful not to use all the credit available to you. Credit utilization is the percentage of debt you’ve used compared with the amount you could potentially take on. A low credit utilization rate improves your credit score. Generally, 30 percent is considered the threshold, meaning if you have a $10,000 total limit on your credit cards and loans, you shouldn’t carry more than a $3,000 balance.

Being prepared with good credit will make it easier to borrow money when you need to. Your credit union can help. 1st United Credit Union offers BALANCE Financial Fitness, an educational and financial counseling program that can help you fix your credit if it’s broken. We also offer credit cards, traditional loans, and share secured loans, that can help you build credit.

Becoming a member of 1st United Credit Union could be your first step toward financial wellness. Get in touch with us to learn more.