The average working American is always thriving for good credit. They are paying their bills on time, cleaning up their credit, and paying off their credit card debt. These days, our creditworthiness is not only measured when we purchase a home or car. One has to have good credit to rent an apartment or buy insurance. Even a prospective employer wants to view your credit report to see how responsible you are in paying your bills and how much debt you carry. Having a strong financial identity is important to achieving the American dream.
So why is all of this crucial to obtaining a decent standard of living? Well, there are benefits to having good credit which is measured by our credit score (we’ll discuss credit scores later). The following advantages to having good credit are:
1. Having more buying power. This means that you have the credibility to get more credit when you need it. You can also have the ability to apply for a decent loan.
2. Getting the lowest interest rates. The lower the interest rate, the sooner the debt is paid off.
3. Access to great credit cards with special rewards. Credit cards with cash back features and zero interest rates for balance transfers are usually offered to credit card holders with good payoff habits.
4. Having the power to negotiate rates and repayment plans. When you have a solid credit history, bankers are willing to bend a little.
5. You can borrow money to purchase a home at a competitive interest rate.
We cannot talk about building your credit without discussing credit scores. Your credit is measured by a score that ranges from 301 to 850, depending on the banking institution. Your score range may fall into the following categories:
Excellent credit: 750+
Good credit: 700 – 749
Fair credit: 650 – 699
Poor credit: 600 – 649
Bad credit: below 600
Many lenders and creditors are going to review your score in order to determine how much you would be eligible to borrow or how much credit you can get. If your score falls within the higher range, you would be considered low risk and you will most likely get approved. On the other hand, if your score falls around 650 and below, you could be denied credit or have to pay a high interest rate.
There are many ways you can build your credit and increase your credit score, whether you are building your credit from scratch because you have your first full time job, or you may have had some hiccups in your financial situation where you have to rebuild your credit again. In either case, the ways to build your credit are the same. So, let’s get started.
1. Establish a good payment history.
Pay ALL of your bills on time. Your payment history weighs heavily on impacting your credit score. Frequent late payments can bring your credit score down. If you are having a hard time doing this, set up your fixed payment amounts automatically to be deducted from your bank account every month. Most expenses are able to be paid electronically online. It is not necessary anymore to have to sit and write out a check. Technology has made it inexcusable to make late payments.
2. Charge only what you can afford to pay.
It would not make sense to take a credit card and purchase thousands of dollars at a time. If you think about it, most people use their credit cards when they have run out of cash. When making a purchase, be realistic about the amount and ask yourself, “How fast can I pay this off?” Lenders and creditors like to see that you charged reasonable amounts. If you are applying for a loan, review your budget first so that you can determine how much you can afford in a monthly payment. You will then be able to figure out how much you can afford to borrow.
3. You only need one credit card.
American Express and any Visa card from your banking institution will do just fine. I have met with many clients who have several credit cards from multiple retailers. Most of them have been tempted to open a credit card account because of the one-day discount with their first purchase from the retailer. When you have multiple credit cards, it is hard to keep up with all of the balances and the variety of interest rates each one has. Keep it simple and use only one credit card for all of your purchases.
4. Use your credit card like a debit card.
In other words, pay off your balance every month. One of the best strategies I share with my clients is to use their credit card like a debit card. How does that work? Every time you use your credit card, you deduct that amount from your bank register. When your bill comes due, the cash is sitting in your bank account should be sufficient enough to cover the full amount of what you had charged. This is a great practice for someone who has their first credit card or someone who needs to rebuild their credit.
5. Carrying a balance is okay, just pay early.
If you have a balance, it is not the end of the world. If you receive your bill every 3rd of the month and the payment is due on the 27th, make a payment from your next pay check. Do not wait until too close to the due date to make a payment. Also, pay at least the minimum plus whatever interest occurred during that billing period. The longer you wait to pay, the more interest will accrue daily.
6. Do not close your accounts.
Believe it or not, your credit score could drop if you closed an account after you paid it in full. Leaving your old accounts open looks good to a creditor or lender because they are able to see how far your credit history goes. Once the closed account is dropped from your credit report, your credit score is impacted negatively because that credit history is removed.
7. Use a Secured Credit Card.
A secured credit card is considered secured because a consumer has to make a deposit of approximately $300 to $500 before the card can be used. The cash deposited is used as collateral against the amount borrowed, which means it is treated like insurance just in case you do not meet the payments. Most of the time, the amount deposited is the credit limit as well. For those consumers that already make their payments on time for other bills but have never had a credit card, this would be a good choice to begin a credit history. Once you’ve had a secured card for at least one year, try to apply for an unsecured credit card. Creditors will be able to see the history of timely payments made and make a decision on how much risk they want to take in giving you credit.
Now that you have learned what it takes to build your credit, how are you going to figure out how you are doing? Acquire the habit of checking your credit report and getting your credit score every year. Reviewing your credit report every year allows you to check for any unnecessary charges or errors. Therefore, you will have the opportunity to correct them before too much time passes.
The most common credit score is the FICO score which stands for the Fair Isaac Corporation. I truly recommend going to www.myfico.com. This is where you can get your true credit score directly from the source that created the scores. Unfortunately, there is a small fee but it is worth paying every year to ensure you are on track in building your credit.
When your time comes to make a major purchase such as a home, there will be several credit bureaus that have kept track of your credit and payment histories. Those bureaus are Experian, Transunion, and Equifax. The bank that is financing your loan is going to review your credit score from all three bureaus and provide an average score from all three companies. If you are married, some banking institutions will take an average score from each spouse.
Understanding the many ways to build your credit is crucial. Once these habits are ingrained in our everyday lives, we are on our way to establishing good credit. On the other hand, life does get in the way and sometimes cash is not available to handle an additional expense. Emergencies and unexpected expenses will always occur such as health issues, accidents, car breakdowns, and major repairs on our home. However, when you are armed with great credit, accessing the funds you need in order to handle those unexpected expenses will be an easy process. You will realize how it was worth it because now you have the tools you need to get that additional buying power on credit or through a loan when you need it.