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Credit 101: Building Your Credit

Share current LOB: PersonalBanking

Establishing a Good Credit History

More than ever, establishing a good credit history now is critical to your financial success in the future. But good credit is not just about getting a better rate when you're ready to buy a home or a car. Your credit history can also determine whether you get a job, a deal on your cell phone or reasonable rates on insurance. One slip-up — a late car payment or maxing out your credit cards — can affect your credit for years.

Now here’s the good news: if you’ve made some mistakes, it is possible to improve your credit score. And if you're a single person or a new couple, you have a once-in-a-lifetime opportunity to build your credit history the right way. Here’s what you need to know.

If you’re just starting out it’s important to establish checking and savings accounts. This is a basic step that's often overlooked by young people seeking credit. More often than not, lenders will see bank accounts as signs of stability. Opening a checking and savings accounts is one of the best ways to start building a financial history.

Next, it’s key to understand the basics of credit scoring. Credit scores provide information on how worthy you are for new credit. The top three most important factors in your scores are:

  • Your payment history: The most important factor in determining your credit score since it is a good indicator of whether or not you will pay your bills in full and on time with new credit. Your most recent payment history factors more heavily, so past late payments can be remedied.
  • Your outstanding debt. The more credit cards you have that are maxed out, the lower your score will be. Try to keep your credit card balances at 25 percent or less of your limits.
  • The length of your credit history. The longer your credit history, the higher your credit rating.

So the best way to maintain a good credit rating: pay all your bills on time, all the time. That said, it’s a smart idea to set up automatic payments (through online banking) or a reminder system so you're never late in making a payment. And you may want to set up overdraft protection on your checking account.

Overdraft Protection is a service that allows clients to link their checking account to other funded checking, savings, money market, credit card or line-of-credit accounts to cover overdrafts. Overdraft Coverage is another service provided by many banks which could also help protect your credit score. With overdraft coverage, banks pay checks as a convenience when the items in question are more than the available balance at the time. All it takes is one missed payment to lower your credit scores. Online banking, overdraft coverage and overdraft protection help protect your credit by reducing the opportunity of accidentally not making a payment.

Also, try not to max out any of your credit cards. Keeping your credit use to less than 25% of your credit limits (10% is better) will help you get the best possible credit scores. And paying your bill in full each month is the best way to keep your finances in shape and build your credit at the same time.

Want to see your current credit report and know where you stand financially? The three major credit-reporting agencies — Equifax, TransUnion and Experian — are required, by law, to provide a free copy, upon request, every year. To get yours, simply visit www.annualcreditreport.com (the only authorized source for consumers to access their credit report) or call 877-322-8228.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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