What is Credit? 
How should I build my credit?

_{By Bromwich+Smith Staff | 796 words | Reading Time: 3 minutes and 58 seconds | Date: 2022/10/21}

It seems like we are raised to know the basics about credit. We know to check our credit score, to pay our bills on time and not to exceed our credit cards. Sometimes, it may be easier said than done and we may be in a situation where we need to evaluate what we know about credit. Let’s start from the beginning.

How is my Credit Score calculated?

When calculating your credit score many things are considered. The biggest factor is your payment history. Any late or missed payments will negatively affect your credit score. The next factor is how much credit you have available vs how much debt you have. If you have a credit card that is often maxed out, or close to its limit you may be seen as a higher risk and have a lower credit score. The length of your credit history will play a part, as will your credit use. By only having one credit card, and no other credit your score will be lower than someone with a similar credit history with 2 or more cards and other credit types. Keep in mind that new credit will account for up to 10% of your score, so refrain from applying for too much credit at once.
Did you know there are several types of Credit, and they all affect our credit scores differently? Let’s look into the most common types of Credit.

Secured vs Unsecured Credit

Secured credit is a loan that is guaranteed with collateral, for example a car loan or a mortgage. If you are unable to make your loan payments, your creditor has the option to repossess your vehicle or foreclose on your house. Unsecured credit is a loan that is not guaranteed with collateral and is typically seen as revolving credit.  This could be a student loan, credit card or personal loan. Unsecured credit is a loan with no collateral. This can include personal or student loans and basic credit cards. It is important to keep in mind that not all credit cards fall into this category, as some are secured with collateral or a deposit to open the line of credit. These cards are growing in popularity for those looking to rebuild credit, have no credit history or have low credit scores.

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Revolving Credit

Credit cards, Personal Lines of Credit, Home Equity Lines of Credit and Credit cards all fall into this category. You as a lender are approved for a set amount of money. You will use some of it but once you make a payment, you’ll have more availability to borrow from the credit again. Payments are typically a percent of your balance, plus interest.

Installment Credit

This credit is most seen in a vendor issued loan like a mortgage, car or personal loan. You will apply for and be approved for a set amount which will be given in a lump sum. The payments will be pre set, for specific dates and amounts. You may have the ability to pay off the debt early, but it is not the case with all lenders. You may want research all your repayment options prior to signing on the dotted line.

Open Credit

Open credit will not typically have a set limit, payments are due in full each month and will vary on usage. This can be seen with a utility bill, where you pay in full each month after receiving the service item. You may not be aware that your utility bills can negatively affect your credit score if these bills go unpaid will lower your credit score.

How should I build my credit?

First step is to know your financial situation, and what credit you currently have. Visit EQUIFAX to review your current credit score. Keep in mind that credit is revolving and will change in either direction based on new information. Dispute any mistakes you find; errors are more common than you may think. Identity Fraud, Duplicate Errors, Balance Errors are all common and can be fixed to ensure your credit score is not negatively impacted.

If you are in a secure financial situation, consider applying for a second credit card. By having more available credit shows lenders you are a low risk and reflect positively. Keep in mind that submitting too many applications can have repercussions. Each credit check can stay on your account for up to two years, or even take points off your score.  Keeping up to date on all your payments may sound overly simple but it is a simple way to help your score. By paying any bill late, you will see a hit on your credit score.

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Good credit is a vital component of healthy personal finance. Focus on all credit types to help you make the most of your credit history.

Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1.855.884.9243, or request a call back at contact us page. We want to see you flourish!