Establishing and Rebuilding Credit

Whether you are new to the workforce and have not established credit, or you made some mistakes along your credit journey, establishing or rebuilding credit doesn’t have to be as difficult or intimidating as it seems. There are some easy first steps you can take to establish and rebuild credit, and methods for sustaining healthy credit practices.


Establishing Credit


  • Renting or leasing. Renting an apartment or leasing a vehicle can offer a way to establish credit. While not all credit reports count these as means of establishing credit, it can offer a way to show your responsibility for paying on time and in the full amounts set by the rental/leasing agreements.


  • Open a secured, student, or store credit card. If you’re up for the responsibility, you could open a secured, student, or store credit card. A secured credit card works much like a debit card. Whatever is deposited into the account is the credit available for use. A student credit card is very similar to a secured credit card. Most times, student credit cards offer few to no rewards, has a low credit limit, and unlike the secured credit card, is typically unsecured – meaning no deposit is necessary to begin use. A store or gas credit card typically have lower credit limits and are designated to specific stores or amenities, making it easier to manage smaller payments and build up budgeting responsibilities. Each credit card option allows you to build responsibility and establish credit without opening a “real” credit card and can be used as “gateway” card to higher credit limits and incorporating other responsibilities that come with a credit card. However, in utilizing these options, it is essential to remember that while they are not necessarily credit cards, they function similarly. All healthy credit habits are still applicable.


  • Co-signer. A co-signer is essentially someone who volunteers to take on the financial liabilities that come with your loan(s). For example, if you’re looking to lease a vehicle and do not have established credit, a co-signer may be used who will be financially obligated through this shared debt endeavor.


Rebuilding Credit


  • Pay off or settle debts. There are numerous different ways to pay off or settle debts. If you can, it is far better to pay off debts than to settle. However, given some circumstances, you may opt to settle a debt. The best approach is to pay off or settle your debts from smallest to largest debt. Paying off a small debt can motivate you to continuing paying off your debt. It may also jumpstart ways for you to save and find a budget that works.


  • Open a credit line. While you may already be in debt due to a credit card and/or might be declined in this option, opening a new credit line can be beneficial. If you are able to do so, ensuring you limit your credit utilization, making all payments on time, and dedicating your credit to small expenses (i.e., gas, groceries, restaurants, etc.) you can pay off quickly and on time will allow you to slowly rebuild your credit. Another suggestion would be to open a secured or store credit card. As with establishing credit, these secured or store credit cards offer you the flexibility of lower credit limits, availability for approval, and better budget management. However, it is important to maintain healthy credit habits to ensure you don’t continue sliding down a slippery slope.


  • Use a co-signer. Like establishing credit, using a co-signer can also help in rebuilding credit. However, it also comes with the same risks for rebuilding credit as it does when used for establishing credit.


Developing Healthy Credit Habits


For those who misused their credit card or were in an unexpected situation that caused a credit disaster, redeveloping healthy credit habits and preparing for unforeseen circumstances can aid in maintaining good credit.


  • Credit utilization. A general rule of thumb is to keep credit utilization below 30%. While it is best to practice lower utilization rates than 30%, this is the minimum utilization that significantly impacts your credit.


  • Making payments on time. It is not only important to make payments on time, but to ensure the full payment is paid. Payments, such as your utility bills, are just as important to make on time as your credit card payment. Any payments that could be sold to collection agencies can affect your credit and should always be paid on time.


  • Credit applications/pulls. Applying for credit cards, leasing a new vehicle, and renting an apartment typically require a credit check. In most instances, these are “hard” credit checks, meaning it affects your credit score. Typically, a hard inquiry occurs when you apply for a credit card, student loan, mortgage, and other types of loans. Whereas, a “soft” credit check does not negatively affect your credit. Pre-approval checks for mortgages, loans, credit card companies, and checking your own credit are all examples of soft inquiries. Too many hard inquiries can negatively impact your credit score as each hard inquiry can deduct 5-20 points off your credit score. Not only does it impact your credit score but can also raise questions to federal credit bureaus.


  • Awareness of what impacts your credit score. Knowledge is power. Knowing what your credit score is and educating yourself on what impacts your credit is imperative to healthy credit habits and scores.


Ailing credit scores can take its toll on anyone and constantly combatting rejections and poor credit practices is tiresome. Stop dwelling over bad credit scores and take control of your credit journey! EmployeeMoney offers financial solutions for expected and unexpected expenses regardless of your credit score. If you are rebuilding your credit, contact EmployeeMoney and let us show you how we can help!