My sister had to use credit cards to pay for her cancer treatment co-pays after she ran out of cash. You don’t know what life will bring. – Teresa
If you don’t have credit or need to rebuild your credit this article will help you get on the road to credit success.
First we’ll understand why establishing a good credit history and maintaining a good credit score are crucial financial goals to achieve. Secondly, we’ll discuss how to get there.
Good credit is the key to making major purchases in life at much lower interest rates than with poor credit. Lenders and even potential employers view your credit score when making decisions about you. Place yourself in the best situation by establishing a positive credit history and building a strong credit score.
How to build credit from scratch
Obtaining credit is almost like getting job experience. You have to get credit to obtain more of it. Translated, your credit score and balance limits will increase as you continue to borrow (and pay back).
Ironically enough, you have to take on some debt to build credit.
Several banks offer credit cards for first-time borrowers, which will more than likely have a small borrower limit of less than $1,000.
One option to build credit is to open one of these cards and spend a little on it. Make sure to pay on time and pay off the whole amount each month.
What is a “good” credit score?
FICO is a company that creates credit scores based on credit history. According to MyFico.Com, credit scores are based on the following factors:
- 35% – Payment History
- 30% – Debt/Amounts Owed
- 15% – Length of Credit History
- 10% – New Credit Inquiries
- 10% – Credit Mix/Types of Accounts
FICO credit scores range from 300 – 850. The higher your credit score, the more trustworthy you are to borrow, and the less interest you will pay on future loans. The key to getting a low-interest rate on a mortgage or car loan is having a high credit score and solid credit history of paying off your debt.
For example, in taking out a 30-year fixed rate mortgage, a person with a credit score of 625 might pay 4.9% interest while a person with a score of 825 might pay 3.3% interest. This might not seem like a large difference, but year after year the difference will add up to tens-of-thousands of dollars.
How to get your credit score
I have a step-by-step on how to get a free credit report
Many banks now offer credit cards that give the added benefit of always knowing your FICO credit score. Your statement or online account will show an updated number each month. This tool is great for understanding how your purchases and payments are impacting your credit.
Some companies you can check out are:
- American Express
- First Bankcard
- US Bank
- Walmart credit card
How to boost your credit score
The key to building a credit score is making timely payments and not using too much of the credit you have available. Vantage Score recommends carrying a balance of no more than 30% of your total limit.
If you have a credit card with a $5,000 limit, try not to have more than $1,500 on the card at any one point. I never recommend carrying credit card debt, so don’t put on your card more than you can pay off when the credit card bill comes due.
If you have more than a card or two, consider closing several of them. Keep the one you’ve had open the longest. Closing extra accounts will reduce your available credit (which is part of the FICO score), but it will improve your types of credit.
For example, it will be better to have a car loan and two credit cards than just ten credit cards. Also, if you are tempted to spend more because you have a Target card and a Gap card, etc., the trade off of closing some accounts will be an overall positive. Fewer cards can also mean less work to pay all on time, and keep up with how much you are spending.
Keep in mind different countries have different rules and criteria on how credit scores are managed. How to improve a credit score in Singapore is different than how to improve a credit score in Ireland. Check with your local rules.
Reasons to check your credit report
There are many reasons to check your credit report. Perhaps you are looking to buy a house, car, or take a school loan. Identifying your credit score and status of all current accounts will let you know if you’re in a good place to take on that debt.
It’s important to check your credit report to protect yourself. Millions of people are victims of credit card fraud and don’t even know it. Hackers who are experts in identity theft steal by opening credit accounts in other people’s names. If you see cards you have not opened or loans you have not taken on your credit report, it is important to dispute errors on your credit report so they may be reported and resolved.
Once you have your free credit report, now we’ll review how to understand it.
Making sense of your credit report
Your credit report will show from which financial institutions you have borrowed funds. Your mortgage, student loans, retail store, and standard bank credit cards are just a few examples. The report will go on to feature how long the accounts have been established, along with the most recent balance carried. The report lists the status of each account (good standing, delinquent, etc.) as well as a detailed history of payments made.
Credit reports also show external requests for your credit history. Each time you apply for a new credit card, car loan, or background check, the organization requesting your credit history will be listed.
You will often see banks who you do not have accounts opened with on this list. They obtain your credit history as a means of saying you are pre-approved to open a new account with them.
It’s safe to ignore these inquiries. It’s like someone at the office asking a co-worker if so-and-so in the accounting department is dating anyone. It doesn’t mean they will be going on a date or getting married, they are just asking if someone is available. The banks are checking if they want to send you junk mail with a loan or credit offer (to date and marry your money).
Take a look at this sample credit report from Experian.
What about mistakes?
Late and missed payments are the most detrimental to your credit history and, therefore, your score. Lenders give credit based on the fact that you are trustworthy enough to borrow money and pay it back as agreed.
Maxed out balances and delinquent accounts indicate a lack of financial responsibility. You won’t be able to obtain more credit/borrowed money if you cannot pay back what you already owe. It also means that you will have to spend time getting accounts in order to improve your score.
Don’t fret if you’ve made mistakes in the past. At least by understanding your credit score and history, you can start to make positive changes.
How should I use credit?
Everyday essentials are ideal to put on your credit card. These items are necessities that you will end up purchasing regardless of your current financial situation.
Groceries, gasoline, toll tags, and phone bills are all standard buys.
Many people fall victim to the idea of using credit as fake money. The temptation of charging that designer handbag or new television sounds harmless. Remember – you will have to pay back the full amount of the purchase at the end of the month if you want to keep your credit healthy.
If you have problems using your credit card responsibly try using the cash budget.
I heard you don’t need a credit score
I’ve heard that too from certain celebrity money experts. If you use cash only to buy everything except a house (cars, vacations, furniture, etc.) and get your mortgage and insurance from the celebrity-endorsed mortgage and insurance brokers, that might work.
First, how do you know if you’re getting the best rates on your mortgage and insurance if you can only apply with companies that don’t use a credit score? Well at that point it’s too late isn’t it. You can’t go back and whip up a credit score to get a mortgage somewhere else.
Second, here are some real stories from people regarding credit scores:
Working with young military members, I regularly run into people who have bad credit because they never began to build credit by getting a credit card. This was based solely on Celebrity Money Expert’s Name Withheld teaching about credit cards. This translates into paying more for auto insurance, utility and rent deposits and so much more. – Ellie
As a landlord of 8 properties I am going to take someone with a 740 credit score (yes I check their history and make sure they aren’t tapped out) than someone with no score. – Elizabeth
When my husband graduated from college with no loans (thank you military scholarship) he had to borrow over $6,000 to get everythign set up. Because he had never used a credit card, he had to give TRIPLE deposits to get places to let him rent. He had to spend HUNDREDS of dollars in deposits. Sure its not a big deal once or twice, but we military move ALL the time. – Elizabeth
The thing is, you never know when you will need credit, and when you need it, it’s too late to get it. When I was 19 and driving back to college with a friend, my father gave me his credit card in case of emergency. The car threw a road and broke the crankshaft, and we used the credit card to pay for a tow, get a hotel room and, ultimately, get a plane ticket back to college. We certainly didn’t carry enough cash to do that back then. – Teresa
Unless you are rich, can pay for everything in cash, and are never going to have a mortgage again in your life, you need a credit score.
Final tips for building credit
It is never too early to start building credit. Several banks offer credit cards to college students who qualify as first-time borrowers. Being responsible with your first credit card will help you save money in the long run.
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