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What the Merrick Bank Credit Building Guide Covers

Merrick Bank offers a free educational guide focused on credit building. The guide presents information about how credit scores work, why they matter, and what steps consumers can take to build their credit history over time. This is an informational resource rather than a service that performs actions on your behalf.

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The guide explores foundational concepts related to credit, including how credit bureaus collect and maintain information about borrowing and payment history. It discusses the factors that influence credit scores and explains why different lenders may view credit profiles differently. The guide does not claim to change your credit score or remove negative information from your credit report.

Credit building typically involves a combination of strategies applied consistently over months and years. The guide touches on various approaches that people use when working to establish or rebuild their credit. These include understanding credit mix (having different types of credit accounts), managing payment history, and reducing credit utilization (the percentage of available credit you use).

The resource also addresses common misconceptions about credit. Many people have questions about how long negative information stays on credit reports, whether closing old accounts helps or hurts credit, and what role income plays in credit scoring. The guide provides factual information to address these questions, though individual situations vary widely.

Practical Takeaway: Before pursuing any credit-building strategy, review educational materials to understand the basics. Knowing how credit scores are calculated and reported helps you make informed decisions about your financial approach.

Understanding Credit Scores and How They're Calculated

Credit scores are three-digit numbers that represent a snapshot of your credit risk at a particular moment. The most widely used scoring models are FICO and VantageScore. FICO scores range from 300 to 850, while VantageScore ranges from 300 to 850 as well. These numbers are calculated using information from your credit reports, which are maintained by three major bureaus: Equifax, Experian, and TransUnion.

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The FICO score calculation breaks down into five main components. Payment history makes up 35% of your score—this reflects whether you've paid bills on time. Amounts owed (credit utilization) accounts for 30% and measures how much of your available credit you're using. Length of credit history represents 15% and considers how long your accounts have been open. Credit mix contributes 10% and looks at whether you have different types of credit (credit cards, installment loans, mortgages). New credit inquiries make up the final 10%.

According to the Consumer Financial Protection Bureau, approximately 26 million Americans have no credit score at all because they lack sufficient credit history. These individuals are sometimes called "credit invisible." Another 19 million have credit reports but no credit score, often because their credit information is too old or sparse. Meanwhile, those with credit scores averaging around 675-725 are typically considered to have fair credit, while scores above 750 are generally considered good or excellent.

Different lenders use credit scores differently. Some lenders focus primarily on your FICO score, while others may use alternative scoring models. Mortgage lenders often use specialized FICO scores designed specifically for mortgage lending. Auto lenders use auto-specific scores. Credit card companies may use their own internal scoring systems in addition to traditional credit scores.

Practical Takeaway: Request your free credit reports from annualcreditreport.com to see what information is being reported about you. Understanding your current credit profile is the first step in deciding whether credit building strategies make sense for your situation.

Payment History and Its Impact on Your Credit Profile

Payment history is the single largest factor affecting your credit score. When you make payments on time, this information is reported to the credit bureaus and contributes positively to your credit profile. Conversely, late payments—even by just a few days—can be reported and may lower your score. A payment 30 days late has different consequences than a payment 60 days late, with more severe delinquencies having greater negative impact.

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Late payments typically remain on your credit report for seven years from the original delinquency date. However, their impact decreases over time. A late payment from six years ago affects your score less than a late payment from six months ago. This means that even if you have past late payments on your record, demonstrating current, consistent on-time payment behavior can help your credit score improve gradually.

Payment history includes all types of credit accounts—credit cards, auto loans, mortgages, student loans, medical bills sent to collections, and other debts. Some accounts may not be reported to all three credit bureaus. For example, you might have a credit card with Equifax but not with Experian. This is why your credit reports and scores may vary slightly across the three bureaus.

Building payment history takes time. Financial experts generally recommend that establishing a positive payment pattern takes at least 6-12 months of consistent on-time payments. Some people use strategies like becoming an authorized user on someone else's account (if that person has a strong payment history), which may add that account to your credit report. Others use credit-builder loans offered by credit unions and banks like Merrick Bank, which are specifically designed to help people establish payment history.

According to Experian, even one missed payment can lower your credit score by 100 points or more, depending on your starting score and how late the payment is. However, the specific impact varies based on your credit history and the scoring model being used. Someone with an excellent credit score may see a larger point drop from a single missed payment than someone whose score is already lower.

Practical Takeaway: Set up automatic payments or calendar reminders for all your bills to maintain on-time payment history. If you have a history of missed payments, focus on making every payment on time going forward—this is the most impactful action you can take for your credit.

Credit Utilization and Managing Your Available Credit

Credit utilization is the percentage of your available credit that you're actively using. It's calculated by dividing your current balances by your credit limits. For example, if you have a credit card with a $2,000 limit and you carry a $500 balance, your utilization on that card is 25%. This factor accounts for 30% of your FICO score calculation, making it the second most important component.

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Financial educators generally recommend keeping your overall credit utilization below 30% and ideally below 10%. Someone with $10,000 in available credit would want to keep their total balances below $3,000 (30%) or preferably below $1,000 (10%). This shows lenders that you can access credit without relying heavily on it. High utilization—say 80% or 90%—may signal to lenders that you're financially stressed or potentially at higher risk of defaulting.

Credit utilization is measured both per card and across all accounts. Your overall utilization rate is part of your credit report, but lenders may also see individual card utilization rates. This means that carrying a very high balance on one card while leaving other cards untouched could still negatively impact your score, even if your overall utilization is reasonable.

Improving your utilization ratio can be done in two ways: paying down balances or requesting credit limit increases. Paying down balances is the most straightforward approach. If you can pay off or significantly reduce balances on your credit cards, your utilization ratio improves immediately and your score may increase within one to two months as the credit bureaus are updated.

Requesting credit limit increases is another option, though this requires careful consideration. Some credit card issuers increase limits without a hard inquiry, while others perform a hard inquiry that may temporarily lower your score. If you request a limit increase and your issuer performs a hard inquiry, your score might dip slightly in the short term, but the improved utilization ratio could provide a larger benefit over time. Never request a limit increase unless you're confident you won't use the additional credit.

Practical Takeaway: Create a plan to pay down credit card balances to reach 30% utilization or lower. This single action often produces noticeable credit score improvements within weeks, making it one of the fastest strategies available.

Building Credit from Scratch or After Setbacks

People build or rebuild credit for different reasons. Some are establishing credit for the first time—perhaps young adults just starting out or immigrants to the United States. Others are recovering from financial setbacks like bankruptcy, foreclosure, or extended periods of missed payments

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