Credit 101: How to Build Good Credit

Most of us have a general idea of what credit is, even before we start planning our finances. What Pinoys don’t talk about enough, it seems, is credit score. Here’s a quick guide on what you should know about it, why it’s important, and how you can get a good credit score.

What is Credit?

In simple terms, credit is the ability to borrow money or access goods or services with the understanding that you’ll pay later.

It’s often interchanged with debt because they both denote borrowing money, but they are different in the sense that if credit is your ability to borrow money (or access goods or services), debt is the money you owe when you use this credit.

So, for example, if you have a credit card with a credit limit of PHP20,000 and you charge PHP3,000 pesos on that card, you will then have PHP3,000 in debt and PHP17,000 in available credit.

What is a Credit Score?

A credit score is a rating system that measures your financial reliability. It’s the reference banks and other financial institutions use to evaluate the risk they take by lending you money.

The score, which ranges from 300 to 950, where the higher it is the better, is based on an analysis of your credit data submitted by banks and other credit providers to a government-accredited third-party credit bureau like TransUnion Philippines.

Factors influencing this score include your payment history, the amounts owed, length of credit history, new credit, and types of credit used.

Why is a Good Credit Score Important?

Think of a good credit score as your ticket to bigger financial opportunities. A good score will give you access to more credit that can unlock major financial milestones like a car loan, a home loan, and a personal loan that you can use to pursue further studies, start a business, or use in case of an emergency.

How to Build Good Credit

Building good credit takes some time and it’s largely about establishing good credit habits:

• Start early by applying for a secured credit card or if you can, get a supplementary card from your parents.
• Always pay your bills on time, and as much as possible, in full. Late payments can significantly impact your credit score.
• Keep your balances low — high balances relative to your credit limit can hurt your score. Aim to keep your credit use below 30% of your limit.
• Apply only for credit you need. Each application can impact your score.
• When you can afford it, aim for a good mix of credit types such as credit cards, a car loan, a home loan, and a personal loan.

Despite how it might feel at first, remember that a credit card is not free money. Make sure that you spend (or swipe) only within your means. Once you feel like you’ve built enough credit, make it a point to regularly check your credit report for inaccuracies that might affect your score. You can request it, for a fee, from TransUnion Philippines.

And finally, financial literacy is key. Keep educating yourself on financial management and credit-building strategies. Here are some articles to get you started:

• Why You Need To Set Your Financial Goals Early In Life
• How to Create A Plan That Will Jumpstart Your Financial Journey
• Smart Money Moves: Mastering Mindful Spending in Your 20s