At many critical points in one’s life, “good credit” is perhaps the most important asset you can possess. Whether you need to purchase a new car, want to buy a home, or even start a business, good credit opens doors and allows you to access sources of funding that might not otherwise be available. However, what does having “good credit” really mean? More importantly, what is it in the first place? Understanding credit and what it means for you and your financial future can seem tricky and even a little daunting at first, but a closer look at how it all works can reveal that it’s not that scary after all. With a clear sense of how your credit works and how to maintain it well, you can establish a firm footing for your growth.
What is Credit?
The best place to begin is with understanding what credit really means. It may sound like a basic beginning, but it’s the ideal way to build up a broader sense of what this is all about. In its purest form, “credit” refers to a type of financial agreement between an individual and a financial institution such as a bank or credit union. The bank agrees to provide the individual with access to a certain amount of funds for making purchases on the condition that the individual will repay the bank over time for the convenience and a fee — that’s interest.
However, “credit” also refers to a more abstract idea, your “creditworthiness,” or how much confidence financial institutions can place in your ability to repay what you borrow. In this sense, “good credit” means a strong track record of on-time payments and a combination of other factors, while “bad credit” might indicate you’ve had difficulties meeting payment obligations in the past. Lenders assess your creditworthiness to determine how much credit to provide you with and what level of risk they assume in doing so.
Credit bureaus, large organizations such as Experian, TransUnion, and Equifax, track information about payment history and many other factors, which in turn contribute to the development of something called a FICO score for every individual. Your FICO, or credit score, is a numerical representation of your creditworthiness. The lowest possible score is 300, while the highest is 850. The higher your credit score, the more credit you are likely to be able to access. For example, a better score improves your chances of approval for an auto loan and increases the likelihood that you’ll receive a better interest rate.
There’s more to credit than these surface layers, however. Have you heard about the four types of credit? Understanding the different types of credit you might be able to access can play an essential role in your future financial decisions. Here’s a quick rundown of the different types:
Service credit is credit you receive for services, such as your cell phone, with the understanding that you will pay the accrued charges at an agreed-upon time. Other examples include utility charges. Some providers of service credit, especially utilities, report delinquencies to the credit bureaus and can thus affect your score. Alongside service credit, installment credit is also very common. This type of credit is a loan with a fixed amount which you then pay back in installments, plus interest, over time — such as a car loan.
Charge credit, or a charge card, is less common these days, but they’re still around. You have a maximum amount you can spend on a charge card, but the bank requires you to pay it in full each month under threat of financial penalties. Finally, revolving credit is what we are all most familiar with — these are cards with a maximum balance that can carry debt from one month to the next while accruing interest. Most credit cards operate on revolving credit. Certain special types of loans, such as a home equity line of credit (HELOC), are also considered revolving credit — and yes, lines of credit can impact your score.
How & Why Does Having Credit Help You?
At the end of the day, what does all of this mean to you? Why do we need credit in the first place?
As mentioned, the way you use credit generates a credit score, and ultimately, it is in everyone’s interest for financial institutions to carefully manage the risks inherent in lending. Riskier loans require higher interest rates because the bank must be able to recoup some of its investment if the individual can no longer pay. When banks can evaluate your credit history to develop a sense of your fiscal responsibility, they can provide quicker decisions when you want to make an offer on that house or trade-in your car for a newer model.
Waiting for approval for an important loan — such as when you’re car shopping after an accident that permanently disabled your previous vehicle — can be a stressful experience. Knowing that you have a strong credit score, however, takes much of the concern out of the equation. Therefore, putting in the effort to build your credit over time can be very valuable. You never know when you may need to seek approval for a loan or an additional credit card.
In some cases, your credit can even have an impact on your job prospects. Some companies will include credit checks alongside background checks as a condition of employment to identify individuals with risky financial histories who may pose a fraud risk. While this type of situation is an outlier and you will typically only face concerns when poor credit prevents you from making an important purchase, it serves to illustrate why maintaining a good credit score is so important.
When Can You Start Building Credit?
Unfortunately, no one starts with a perfect credit score — or much credit to speak of at all, in fact. After all, how can a bank reliably understand the level of financial risk they incur in loaning to you when they don’t have any history upon which to base their conclusions? Having no credit history can be especially difficult when you want to understand how to build credit at 18. Doesn’t it seem like a “chicken and egg” scenario where you need credit to get credit? In some cases, it can indeed be a challenge to make a start. However, there are options available to just about everyone.
The most common method is to build credit with a card, and you may be able to start doing that as soon as you are 18. Many banks will offer “secured” credit cards, which require a deposit of funds equal to the credit limit on the card. Using this balance responsibly and paying your bills on time will help to develop your credit score. Want to know where you’re at in terms of progress? You’re entitled to one free credit score from each of the major bureaus every year — pull one of your reports and take a look! At Resource One, we provide easy access to secured cards and other options for those just starting on their credit journey.
In some cases, you may not need to start building credit, but rather to start rebuilding it after a long period of financial hardship or difficulties in keeping your credit utilization rate low. Could you do something such as raise your score in 30 days? In many cases, yes — though how much your score will increase will depend on your specific situation and what negative marks there may be on your credit report. However, taking action as simple as paying down your card balances and avoiding further spending can increase your score. Your credit utilization, or the amount you’ve spent versus your total available limit, is a factor in your score. Reducing your usage percentage can have positive impacts.
Where Can You Go to Get a Credit Card?
With one of the easiest ways to build credit over the long term involving well-maintained credit card accounts, the next question you may have is simple: “How do I get a credit card in the first place?” While there are many companies out there whose business revolves around extending credit to individuals, you can always visit your bank, such as R1CU, to request a credit card application. Most financial institutions offer credit in this way. Beware of online applications that can be a portal to giving your information away to unscrupulous third parties. At Resource One Credit Union, we offer both a secured Visa credit card and an unsecured Visa Platinum card. Visit us to ask about which is right for you. Stopping in to one of R1CU’s local branches, such as those located in East Dallas or Garland, can allow you to navigate the process with the help of a friendly branch employee. One thing to keep in mind: cards can help you build credit, but improperly used, they can negatively impact your credit, too.
Building Credit Without a Credit Card
With that thought in mind, what if you don’t want to take on the temptation of a credit card, or you aren’t sure you can gain approval for one in the first place? Don’t worry; that doesn’t mean you’re out of options. In fact, there are other options available that can provide you with financial flexibility without too much-added risk. Think of it as a credit card with training wheels — you’re limited in the amount of trouble you can encounter.
“Credit builder” loans are a popular choice. These simple personal loans are intended for those with weak or no credit history and allow you to establish a track record of regularly making your payments. After some months of staying on time and current each billing cycle, your score will begin to increase. Over time, these loans can facilitate important gains for your score. At R1CU, we have a range of credit builder options you can use. Becoming an authorized user on someone else’s credit card will also allow you to build credit so long as they maintain their account appropriately. This method can give you access to credit you can use responsibly as well, or you can simply wait for the original user’s good credit history to help uplift yours.
Consider another scenario: one in which you need to rebuild your credit quickly. In this case, opening a new unsecured card may not be possible or even wise. When you’ve had past trouble with your credit accounts, you need to take a series of specific actions to work to rebuild your credit. First, pay down your debt as much as possible as soon as possible. Maintaining cards at or near their credit limit can make it difficult to pay down debt. Consolidating may be a smart idea in such a situation. Likewise, using products similar to those for individuals with little credit can pave the way towards a repaired score. Credit builder loans and secured cards, properly maintained, can both go a long way towards lifting your score.
Building Credit through a Credit Union vs Using a Bank
All this brings us to one final question: where should you go to start improving your credit? Should you opt for a large, potentially multinational bank, or stick to a more local credit union? There are pros and cons on both sides of the argument. In a bank’s favor is often the convenience of many branch locations and the range of credit card products available. However, you may find that these large banks are relatively inflexible when it comes to special cases, and you may not be able to easily build or repair credit if you do not have a strong report already.
On the other hand, credit unions, such as Resource One, are nonprofit ventures that are “for members, by members” — in other words, they have a vested interest in providing good service and flexible products. Credit unions adhere to many of the same financial regulations as larger banks in terms of maintaining operating reserves but can provide a more tailored service – and, therefore, you’ll find credit builder loans and secured credit cards more easily accessed at your local credit union. In combination with many of the other perks you can encounter when you steer away from the biggest banks, credit unions can offer an overall better experience, especially for those in unique situations.
Visit Your Local Resource One Credit Union and Start Your Credit Journey Today
At Resource One Credit Union, we’re dedicated to providing a superior banking experience for all our members — and that includes assisting in the development and maintenance of good credit. From credit builder loans to options for a secured credit card and more, we make it simple to access the tools necessary to build credit fast. With 8 locations throughout Dallas and three more in Houston, it’s easy to make your way to a financial institution ready to provide you with the support necessary to improve your score and set the stage for a stronger future. Visit one of our locations today or contact us to learn more about credit and your options.