To reach life’s milestones, you’re likely to need credit. For many (arguably most) people, going to college, buying a first home, or starting a business all require a loan. But if you can’t show that you’re responsible with money, you’ll have a hard time finding someone who will extend you credit.
Luckily, you can work with your bank to build your credit score and get that much closer to achieving your dreams. Outlined below are five ways your bank can help you restore your credit.
1. Secured Credit Cards
Over 30 banks offer secured credit cards to enable their customers to build credit. A secured credit card requires a security deposit or initial funds transfer to open an account. This reduces the credit issuer’s risk. If you don’t pay your bills, your bank can simply take what you owe from the deposit.
Whether you’re a young person who wants to build credit or you need to repair damaged credit, secured builder cards can help. Data from secured credit cards is sent to credit bureaus and is included in your credit report. So as long as you pay your bills on time, you’ll slowly begin to increase your credit.
When making purchases with a secured card to build credit, try to use it sparingly. It’s best to keep your credit usage below 30%. Your credit utilization makes up nearly a third of your credit score, so keeping utilization low can improve it.
2. Credit-Builder Loans
Like secured credit cards, credit-builder loans are designed to enable individuals to build or rebuild their credit. Credit-builder loans, also known as “fresh start loans,” aren’t typically offered by most major lenders. So you may need to talk with a smaller financial institution like a community bank or credit union to use this credit-building tool.
Once you’re approved for the loan, the bank keeps the borrowed amount in a savings account. In order to receive this money, you pay the bank in monthly installments until the loan term ends. These payments go into your account, allowing you to save money as you build your credit.
When choosing a credit builder loan, it’s important to pick the right type. Find one with a payment amount you know you can afford. If you stretch your budget too far, you’ll increase your chances of missing a payment, further damaging your credit score.
3. Autopay
Your payment history is considered one of the strongest indicators of your likelihood of paying off debts. Because of this, it makes up 35% of your credit score, the most significant chunk. Many service providers, vendors, and other creditors report your monthly payments to credit bureaus. So failing to pay your bills on time could have a significant impact on your credit score.
Keeping track of all your monthly payments can be a challenge. When you’re juggling rent, credit card bills, streaming services, and more, it’s easy for something to fall through the cracks. That’s where autopay comes in handy.
Many banks offer autopay to enable their customers to handle regular payments. Using this feature can serve to ensure that all your bills are paid on time each month.
When setting up automatic payments, keep in mind your salary schedule. Do you get paid once a month or every other week? Depending on when you get paid, you may want to set automatic payments to withdraw from checking at different times throughout the month. This can help prevent you from accidentally overdrafting your account.
4. Budgeting Tools
Excessive credit card debt can have a serious impact on both your credit score and your finances. High credit card debt typically means high credit utilization. This negatively impacts your credit score and can make it more expensive to get a loan.
If you struggle to pay off credit card debt, budgeting can help. Budgeting allows you to create a plan of how you’re going to spend and save your money. Staying within your budget ensures that you keep credit utilization low and have enough money to pay off your card each month.
Old-school budgeting methods required budgeters to meticulously track every purchase they made. But this process can get exhausting, and it’s easy to accidentally forget to include some purchases. Luckily, many banking accounts offer budgeting tools to help you reach your financial goals. From cash flow dashboards to “savings buckets” that let you save for certain goals, these tools make responsible money management easier.
5. A Co-Signer
Unless you get a secured credit card or a credit builder loan, it can be hard to build a credit history. Luckily, banks may extend you the credit you need if you have a co-signer. A co-signer is someone who is required to pay back a loan if you fail to make payments.
Because a co-signer reduces the bank’s risk, they will be much more willing to lend to you. Working with a co-signer allows you to find new ways to build credit history and explore dream opportunities. Common co-signing scenarios include student loans, residential leases, and car loans.
While using a co-signer has its benefits, there are a few considerations to keep in mind before going this route. First, if you’re unsure you can make the required payments, don’t ask a family member or friend to be your co-signer. Even the closest relationships can be broken if you fail to follow through on your financial responsibilities. Next, it’s important to know that your credit score is at the mercy of your co-signer’s financial health. If your co-signer’s credit score drops, that could negatively impact your score as well.
Building or restoring credit is a daunting task, but you don’t have to do it alone. Ask your bank about their credit-building options and develop a plan to increase your score.
