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Understanding Credit: A Primer for the Unbanked on Building Credit History

Welcome to the exciting world of credit! If you’re one of the many individuals who haven’t yet ventured into the realm of credit due to lack of knowledge or uncertainty, this primer is tailor-made for you. We understand that building credit history can seem like a daunting task, especially if you’re unbanked. However, fret not! In this blog post, we’ll break down the essentials of credit, its importance, and how you can start your credit journey from scratch. So, grab a cup of coffee, get comfortable, and let’s dive into the fascinating world of credit.

Understanding Credit: What is it, and Why Does it Matter?

First things first—what exactly is credit, and why should you care about it? In simple terms, credit is a financial tool that allows you to borrow money or access goods and services with the understanding that you will pay for them later. Your credit history is essentially a track record of how responsibly you manage borrowed funds and repay debts.

Now, you might wonder, “Why do I need credit?” Well, credit plays a crucial role in various aspects of your life. Whether you’re applying for a car loan, a mortgage, or even a credit card, your credit history is a major factor that lenders consider. A positive credit history can lead to better interest rates and more favourable terms. Moreover, it’s a reflection of your financial responsibility and can impact opportunities like renting an apartment or even landing a job.

Building Credit from the Ground Up

Building credit history can seem challenging, especially if you don’t have a traditional bank account or a credit history to start with. However, the good news is that there are accessible and practical ways to kickstart your credit journey.

Secured Credit Cards
A secured credit card is an excellent tool for establishing credit if you’re starting from scratch. Unlike a regular credit card, a secured card requires a security deposit, usually equal to the credit limit. This deposit protects the issuer in case you default on payments. By using a secured card responsibly, you demonstrate your creditworthiness and build a positive credit history.

Credit Builder Loans
A credit builder loan is designed to help individuals build or rebuild credit. These loans work by having you make small monthly payments into a savings account, and once the loan term is complete, you receive the total amount. The timely payments are reported to credit bureaus, boosting your credit score over time.

Become an Authorized User
If you have a friend or family member with good credit, consider becoming an authorized user on their credit card. Their responsible credit behaviour will be reflected on your credit report, aiding in building your credit history.

Understanding Credit Scores and Reports

Your credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. The higher the score, the better your credit. Lenders use this score to evaluate the risk of lending to you. Factors that influence your credit score include:

Payment history
Credit utilization
Length of credit history
Types of credit in use
Recent credit inquiries
Regularly checking your credit report is crucial to ensuring its accuracy. You’re entitled to a free annual credit report from each of the major credit bureaus—Experian, TransUnion, and Equifax. Review your report for any discrepancies or unauthorized accounts and report them promptly.

Tips for Managing Credit Responsibly

Now that you’ve laid the foundation for building credit, here are some essential tips to help you manage it responsibly and improve your credit score over time:

Pay on Time, Every Time: Your payment history is the most significant factor affecting your credit score. Ensure you make all payments on time, whether it’s a loan instalment or a credit card bill.

Keep Credit Utilization Low: Aim to keep your credit card balances below 30% of your credit limit. High credit utilization can negatively impact your credit score.

Don’t Apply for Too Much Credit at Once: Multiple credit inquiries in a short period can lower your score. Only apply for credit when necessary and avoid making numerous inquiries.

Be Patient and Persistent: Building credit takes time and consistent effort. Stay patient and persistent in your financial journey.

Building Credit Through Responsible Spending and Financial Education

Apart from the strategies mentioned earlier, another crucial aspect of building credit involves responsible spending and financial education. Let’s delve deeper into these elements and understand how they can significantly impact your credit journey.

Responsible Spending
Responsible spending is the cornerstone of good financial health and a robust credit history. It involves managing your finances in a way that allows you to meet your financial obligations while also saving and investing for the future.

Budgeting: Create a budget that outlines your monthly income, necessary expenses (like rent, utilities, groceries), and discretionary spending (entertainment, dining out). Stick to your budget to ensure you have enough funds to meet your financial obligations.

Emergency Fund: Build an emergency fund to cover unexpected expenses like medical emergencies or car repairs. Having this fund in place ensures you won’t have to rely on credit or loans during tough times, helping you maintain a good credit score.

Avoid Overspending: Use credit responsibly by not exceeding your credit limits and only using credit for necessary purchases that you can afford to pay off within the billing cycle.

Common Myths About Credit Debunked

As you embark on your credit-building journey, it’s essential to dispel any myths or misconceptions that could hinder your progress. Let’s debunk some common myths about credit:

Myth: Checking Your Credit Hurts Your Score
Fact: Checking your own credit (a soft inquiry) does not impact your credit score. Only hard inquiries, initiated by lenders during credit applications, affect your score slightly.

Myth: Closing Credit Accounts Boosts Your Score
Fact: Closing credit accounts can actually harm your score by reducing your available credit


Understanding credit and building a credit history is a fundamental step toward achieving financial stability and reaching your goals. Remember, everyone starts somewhere, and the key is to take that first step and stay committed to responsible credit management. By utilizing secured credit cards, credit builder loans, and smart financial habits, you’ll be on your way to building a strong credit foundation. Embrace the process, stay informed, and watch your credit history flourish. Happy credit building!