Mastering Credit: Understanding, Building, and Managing Your Credit

Credit is important to securing a personal loan, buying a home, and making other big financial decisions. Every financial decision you make can impact your credit score; making good financial choices helps lenders and businesses view you as a low-risk borrower. The problem is that building credit can be difficult if you don’t know how to start.

According to The Fair Isaac Corporation (FICO), the average FICO credit score in the U.S. is 717 as of October 2023. Whether your credit score is close to this number depends on several factors — but don’t be discouraged if it falls below this national average. Credit scores range from 300 to 850, and it’s possible to raise a bad credit score with the proper financial practices in place. 

Consider this blog as your guide to mastering credit. We’re covering how to build and manage credit history so you can start doing so for the first time and be more strategic in your credit building. 

How Banks Evaluate Credit Scores

Before we determine how to raise your credit score, it’s important to know exactly what it is and how banks evaluate this number. A credit score is a numeric valuation that lenders use to assess the risk of offering you a loan or providing credit. The most commonly used type of credit score is the FICO score. FICO score uses a proprietary formula to calculate a score based on data from an individual’s credit report. It uses percentages to highlight how important each category is, following this order:

• Payment history: 35% — Regular, on-time payments and no bankruptcies or defaults show good financial management. 
• Amounts owed: 30% — Your credit utilization ratio is vital here, showing the amount of credit card debt you carry relative to your credit limits.
• Lengths of credit history: 15% — Longer credit histories are often better.
• Credit mix: 10% — It’s beneficial to have both revolving and installment credit.
• New credit: 10% — If you’ve opened several credit applications recently, it can trigger a hard credit check, often lowering your score for a few months.

What Information Credit Scores Don’t Consider

Your credit score is completely unique, but it doesn’t take into account any demographic information like the following:

• Your race, color, religion, national origin, sex, or marital status. U.S. law prohibits credit scoring formulas from considering these facts, as well as any receipt of public assistance or the exercise of any consumer right under the Consumer Credit Protection Act.
• Your age.
• Your occupation, salary, title, employer, date employed, or employment history. Keep in mind that lenders, however, may consider these factors when making an approval decision. 
• Your location.
• Soft inquiries. These are usually initiated by other entities, like companies making promotional offers of credit or your lender conducting regular reviews of your existing credit account. 

Step-by-Step Instructions to Create Good Credit History

While it takes time and consistent effort, creating a credit history doesn’t have to be a headache. In fact, it can be a rewarding experience that will pay off in the long run — especially when it comes time to make a big financial decision like buying a house or sending your child to college. 

Ready to start building your credit history? Follow these steps:

Step 1: Select a Credit Card

To build a positive credit history, you must have a credit card. However, it’s important to choose one wisely. You may be able to get one from your bank or a third-party credit card issuer, and the bank team members can help you determine the right card for your needs. Many banks offer beginner-friendly options like a secured or student credit card designed for those with little to no credit history. These cards typically come with lower credit limits but are a way to start building a track record of responsible use. Avoiding a higher credit limit is beneficial as you get started.

Don’t forget that your applications are subject to credit approval, so it’s a good idea to start with options that match your current financial situation. Once approved, manage it by keeping your balance low and paying your bills on time. 

Step 2: Secure a Credit Builder Product

Another smart move is using a credit builder product, a tool used to help people increase their score. These resources, like credit builder loans, are designed for people just starting out. Typically, you can borrow an amount that’s held in an account that’s not released until the secured loan is paid off. This shows you’re capable of making payments on time, which in turn builds your credit score and history. 

These types of tools are safe and structured ways to build credit while also practicing good financial habits, reinforcing the importance of timely payments and helping you get into a healthy financial rhythm. 

Step 3: Get Credit for the Bills You Pay

Did you know some of your everyday bills can help build your credit history? While things like rent, utilities, and streaming subscriptions don’t typically impact your credit directly, some services can report these payments to the credit bureaus. Linking these recurring bills to your credit card ensures you have a consistent record of on-time payments. 

Just make sure you pay off your credit card balance each month to avoid interest charges. Not only does this build a good credit history, but it also helps you develop a smart bill repayment plan as time goes on. 

Step 4: Be Mindful of Hard Inquiries to Your Credit

While applying for credit is an important part of building credit history, you must be cautious of how often you allow hard inquiries on your credit report. A hard inquiry happens when a lender checks your credit score as part of their approval process, and too many in a short period can negatively affect your score. While the number of maximum credit inquiries varies among lenders, most consider six total inquiries on a report at one time too many to gain approval for an additional credit card or personal loan. 

To avoid this, only apply for credit when you really need it, and try not to open multiple accounts at once. By being aware of your credit activity, you’ll build a stronger credit history and ensure your score remains healthy as you progress toward larger financial goals. 

Credit Habits to Start

Like any new habit, these financial steps won’t make a difference overnight. However, with consistency and intentional action, you’ll get your credit score where you’d like it. Additionally, you can start these good credit habits today:

• Keeping your credit card balances well below your credit limit is important.
• Maintain old accounts, even if you don’t use them regularly. Credit age — how long your oldest account has been open — impacts your credit score, leaving the potential for bad credit.
• Keep your credit card debt levels low and consolidate any debt that you have.
• Pay your balances consistently and on time.
• Avoid derogatory marks, which have a high impact on your credit history and score. These include negative items on your credit reports, including collections and public records like bankruptcies, civil judgments, and tax liens. Work to resolve these issues and monitor them to ensure the information is accurate. If anything is off, a dispute can be filed with the debt collector or credit bureaus.

Working With Cathay Bank

Yes, building a credit history and maintaining a good credit score takes time, but you don’t have to do it alone. Our team at Cathay Bank is here to make this process as easy and stress-free as possible. As you follow these beneficial steps, see where you’re at and track your progress with SavvyMoney®, a comprehensive tool empowering you to take control of your credit score and reports in real-time through online and mobile banking. Log in to Cathay Bank Online Banking for free credit reporting with SavvyMoney®.

Also, an exciting new credit card program is on the way! Whether you want to build your credit score or get more money back, our team can help you determine the best credit card for your needs. Get in touch with one of our team members today to learn more about our future credit card offerings or receive credit counseling services.

*Please note that this article is for educational purposes. Credit Card companies look at many factors to determine your credit card options; therefore, a specific FICO score does not guarantee a specific rate, approval of a credit card, etc. Cathay Bank does not provide advice or assistance with rebuilding or improving your credit record, credit history, or credit rating.