Buying a home, financing your education, getting your car, finding a job, and securing an interest rate for a personal loan all hinges on your financial standing. You definitely do not want to get off on the wrong foot when building your credit score. Building a good credit history starts with your very first credit card, so use it responsibly. This complete guide to building good credit will help you, whether you are building your credit score from ground zero or you are fixing an existing credit score that has been badly broken.
Understand Credit Isn’t Built Overnight
An excellent credit score is not built overnight, but the strategies mentioned hereunder will help you build one at a faster rate. According to Barron Advisors, one of the leading financial institutions in the country, being intentional about how you borrow money, ensuring that you build a positive payment history, and avoiding terrible credit pitfalls will help you beef up your credit score. It is important to remember that building your credit from the ground up means it will take around 6 months for you to have an actual credit score. The reason rests on the scoring algorithm, which needs you to have an account active for a minimum of six months before it can accurately report your credit history.
Build Credit by Establishing a Reliable Payment History
Having a good score means that you have shown you’re a responsible credit user, managing to pay your obligations on time. The first step to building credit is getting credit. Your first credit card has the most value, so be mindful with your expenses. Make sure that you can pay the balance in full every month to establish that you have a good grasp on spending your money.
Get a Secured Credit Card
If banks are having a hard time giving you the ordinary credit card, opt for this secured version. This requires that you make a security deposit against the credit limit, so you can be approved. The deposit acts as collateral, which assures the bank that their money is safe. This is then refunded when you close your card or upgrade to an unsecure, ordinary credit account. Banks will most likely approve you easily because this eradicates their risk.
Consider a Retail Card
As a neophyte credit consumer, you have better chances of being approved with a retail or store credit card. Barron Advisors explain that unlike major credit cards, these retail cards have less stringent credit requirements because you can only use them in that specific store. Unfortunately, these cards don’t have a high credit limit, and they typically come with high interest rates. They do, however, come with perks such as double points or additional discounts. As with any card, keep track of your expenses and be mindful of what you spend. Always remind yourself that this card is there to build your credit and it is not a reason for you to go on an all-out shopping spree.
Request to Be an Authorized User
Ask to be someone else’s authorized user on their credit card. This means a person with a major credit card gives you access to share his credit. You get a supplementary card with your own name, but you share the credit balance with the main user. You are then called an authorized user. Being one can start your credit score rolling. Just ask the credit issuer to report it to a credit bureau so you can get your credit score. Just make sure everything is in good standing before you ask for this report.
Get a Co-Signer or Guarantor
If you want to buy your own car but don’t have a good credit history, ask someone you trust to co-sign the loan on your behalf. Of course, this someone has to have good credit standing or it jeopardizes your own loan. This person acts as guarantor to cover your loan payment should you fail to meet them. This joint liability increases your chances of being approved because it limits the risk. Remember that your actions will affect your guarantors’ credit so be responsible with payments. Once you get approved, this will make a positive mark on your credit history, and in time you will no longer need anyone’s help.
Make Prompt Payments
The biggest thing about borrowing money is making sure you have the capacity to pay it all back. No one wants to have missing money, and that includes banks and other lending institutions. As a result, payment history is one of the biggest elements that influence your credit rating. If you want a good score, then make your payments promptly each month on or before the deadline.
It is good practice to always pay for everything on time. Bills like utilities, internet service provider, cable, and the like don’t automatically get sent to a credit bureau. However, the moment you make several defaults on the monthly payment, this will go to a credit collection agency, and it will end up on your credit history, thereby hurting your credit score.
Resist the Call of Many Cards
Accumulating a collection of credit cards may seem like a good idea, but don’t make the mistake of opening up too many cards. The more cards you have at your disposal, the more inclined you are to spend. Keeping track of the balances, due dates, and interest rates will be hard to do. The volume of cads will confuse you making you prone to errors like delayed payments. On top of that, applying to so many cards in a short period of time causes too many inquiries on your credit history. This raises the red flag and it can hurt your credit rating. Keeping your cards to a bare minimum is a more sound decision.
Watch What you Borrow
The number one rule is: borrow within your means. Never borrow more than what you can afford to pay each month. If you do, you’ll have no money to pay for everything when the billing cycle is up and the payment is due. Spending way beyond your means on your credit card is irresponsible behavior that will lead to your credit rating downfall. If you’re paying only the minimum on your credit card bills, then that is a huge red flag because you’re forking over more money to pay the interest and you are keeping yourself in debt longer.
The same thing goes for when you are applying for a loan. Before you sign the contract, make sure you read the fine print, do your calculations to make sure that you can afford that monthly payment. Again, delayed payments adversely affect your credit score. The best way to take ownership of your credit is to be a responsible user. Regularly check your credit score and verify if the information is accurate. Only you have the power when it comes to maintaining a good credit standing.