Credit is a necessary evil in our modern world. With the cost of so many things being relatively high, few people can manage to purchase everything with cash on hand. They must borrow money on credit to make substantial purchases. Therefore, building your credit is important. 

Credit is really about trustworthiness. Credit allows you to borrow money with the understanding that you will pay it back over time. Lenders must be able to trust you to risk loaning you money and trusting you. A good credit rating means that you have been deemed trustworthy, or creditworthy, and are therefore a good risk for lenders. 

Establishing Credit 

When seeking to make large purchases, such as a home or vehicle, you often must demonstrate that you have a solid credit rating. A primary consideration in having a good credit rating is having some history of how you have used credit in the past. But how do you first establish some credit? 

There are some tried and true methods of establishing credit so you can begin building a solid credit history. Here are the most popular and reliable methods: 

Credit Cards 

Obtain a beginner-level credit card. These often require you to pay a security deposit up front, called a secured credit card. Then, use the card well within your budget and pay the payments on time each month. Ideally, you should pay off the balance each month to save interest, but the credit card company does not rate you favorably because you aren’t making them money. Regular, on-time payments will help establish your credit. 

Installment Loans 

You may need a cosigner to get started, but installment loans are another way to establish and build good credit. A cosigner is someone with good credit who will agree to pay off the loan if you default. You can make on-time payments over the course of the loan and use this to build a solid, reliable credit history. 

Credit-Building Loans 

Many local banks and credit unions offer credit-building loans for first-time clients with no established credit. You can expect a higher interest rate, but the loan is solely in your name, which helps to establish credit. Be sure to make your payments in full and on time to build a solid, dependable credit history. 

Repairing Damaged Credit 

If you have had trouble managing your credit in the past and already have a poor credit rating, you can take steps to repair damaged credit. Just like establishing initial credit, repairing credit involves building a reliable record of in-full, on-time payments over time that will eventually overcome your negative credit. 

Review Your Credit Reports 

An important first step to repairing your credit is to check your credit reports for errors. Obtain your free credit report from all three credit bureaus and review them carefully. The Federal Trade Commission (FTC) reports that about one in every five consumers have an error on their credit report and most are unaware of it. Get your once-a-year free copies here: 

1. Equifax® 
2. Experian™ 
3. TransUnion® 
4. Complete the Annual Credit Report Request Form  

Then, carefully review them each for the following common errors: 

• Accounts that do not belong to you 
• Accounts that are still open although they have been closed or paid in full 
• Inaccurate payment reports, such as reporting late payments that were made on time 
• Outdated information about past, closed accounts 
• Bankruptcies that have been discharged 

The FTC provides guidelines for reporting errors to the credit bureaus. Report all errors and keep checking and contacting them until the errors no longer appear on your credit report. You may also have to contact some debtors to get help with correcting errors. Be courteous and professional at all times, and continue your contacts until every error is eliminated. 

Reduce Outstanding Debt 

You can also embark on a program of reducing debts. Reexamine your budget and determine where you can trim and save funds from your regular income. Also, use any unexpected income to whittle away at debt (gifts, tax refunds, etc.). Here are some helpful tips: 

• Focus on eliminating high-interest debt first (credit cards, revolving accounts, etc.). 
• Use money saved from paying off these accounts to pay off smaller debts. 
• As each debt is eliminated, apply the saved funds to the next larger debt. 
• Keep doing this until all debts are paid off. Be sure each one is reflected in your credit report. 

Sometimes you can get rid of excess possessions and use those funds on excess debt. Take a look around your home for old, usable furniture, clothing, vehicles, entertainment items, motorcycles, boats, campers, and other valuables that could be better used to help you start over. Selling these items can be a great way to speed the process of eliminating debt. 

Consider a Debt-Consolidation Loan 

While this entails obtaining another loan, sometimes it can be a great way to eliminate smaller debts while embarking on a credit repair process. Pay off as many smaller debts as possible with a loan featuring payments you can easily make with the money you save. Pay more than the minimum loan amount each month. While taking out a new loan may drop your credit score at the beginning, the long-term effect can be a faster road to credit repair. 

Work with a Credit Counselor 

Beware of some “credit repair agencies” who advertise that they can eliminate your debt quickly; these are often agencies that recommend bankruptcy, which can pose enormous damage to your credit for a long time. A true credit counselor will help with budgeting, reducing debt, negotiating with creditors, and other measures to help you get a better handle on your credit. 

Better Rate Mortgage has loan experts who can answer your questions and provide seasoned guidance when you are ready to buy a home. Contact us today to speak with a team member or take our fast Home Purchase Qualifier!