Are you planning on buying a car? How about a house one day? Or perhaps you need a loan? There is one number that is silently connected to you that could stand in your way; your credit score. This number is calculated behind the scenes and yet it influences your future purchases considerably. To increase the value you need to build a credit reputation read further for all the answers you need to achieve this. Building credit- how to, and why it’s important… Dive in.
What Is Credit and Credit Score?
Simply put, credit is the ability to borrow money you would get from a ‘credit grantor’. You sign an agreement that states you will pay back the amount with all the additional finance charges at a mutually agreed upon time. You can use this money to purchase goods and services that you may need but not have enough of your own cash to pay for.
The most common way you can get credit is a credit card. To get a credit card may be harder if you don’t have any credit score or history.
So What Is A Credit Score?
A credit score is a three digit number representing your ‘credit worthiness’. This value is calculated based on an analysis of your credit files. This is usually done by various credit bureaus. The higher your number, the more likely banks, credit card companies, and various other lenders will be willing to lend you money. The more current credit accounts you have, without being in debt, the higher that value will be. If you don’t have any credit or accounts that value will be very low, decreasing the likelihood that you will be able to successfully apply for and receive credit. This can be disappointing and frustrating because you may already earn the required income they specify and already have fixed assets.
Why Is Building Credit Important?
If you want to make a major purchase, such as buying a car or a house, you will need a good credit history in order to be more successful. This also extends to smaller purchases, such as getting a phone contract or getting a loan from your bank. These institutions don’t want to lend credit to someone who may fail to make the agreed payments. After all, they want to earn money from you, not lose it. By having a good credit history, you show that you are responsible paying off accounts. This will make getting credit easier as you are not considered a potential ‘risk’ client.
Having a good credit history will also be beneficial for another reason. Did you know that your credit score and history can be used by potential employers, landlords and estate agents? When you contact a landlord or estate agent with the intention of renting a house, they may take your credit history as a determining factor. They may use it to see the likelihood of you paying your monthly rent on time, every time. They do not want to risk losing money in these transactions. Employers can use it as a background check when considering hiring you to make sure you are a trustworthy person. If you are in bad debt or even blacklisted, the chance that they will hire you is slim. This is more important given what type of company you want to work for. Financial companies for example, are definitely more likely to see this as an important determining factor. So as you can see, knowing and building your credit score and history is extremely important to ensure success in your future endeavors.
How Do I Build Credit?
Here are my tips
- One of the best and easiest ways to start building credit is to sign up for a secure credit card. A secure line of credit, is a credit card that you make a deposit of $50-$100 before getting approved. I built my credit into what it is today using Capital One secure credit card.
- Keep your utilization rate low. Ideally, keeping your balance below 30% is recommended. For example, if your credit limit is $2,000, try not to have a balance over $600. I try to do this every month also, it is so not easy, But needed.
- The age of your account is important. The longer the relationship between you and your card, the better! Even when cards are paid off, don’t close them.
- Pay your balance off and on time each month (I know, easier said than done). Paying off your balance each and every month is probably the biggest factor in credit worthiness. This is very important to do.
- Check your credit report. At least once a year to make sure there isn’t any mistakes on it. Often time there is sadly. A few years ago, I found a mistake on my credit report and I was able to report it. The error was removed, and my score improved. Now, what would’ve happened if I did nothing? Luckily nowadays, many credit cards offer free credit updates monthly so that you can easily keep track of your score and credit activities.
Checkout this story of a childhood friend of ours, Judith, and why it’s good to check your credit report.
Don’t forget these steps!
Remember, start off slowly, get a credit card and once you have credit accounts, be responsible ab them. All of this will make you appear more reliable and trustworthy, and getting credit will be that much easier. Building and maintaining a good credit score and history is the best thing you can do for yourself. Make a list of your current income and expenses, then use that information to set a budget of how much credit you spend, and stick to it.It’s important when you want to start building credit, you do it slowly over time. Don’t be tempted to ‘jump into the deep end’. If you open too many different accounts too quickly, you may do yourself more harm than good. Having too many accounts may result in you possibly defaulting in some payments, which then lowers your credit score. A negative credit score is as bad as no credit score.
Once you have an account/s, be sure to pay the bills on time; as you would your rent, insurance, utilities, etc. If you start to or continually make late payments, called delinquencies, you will decrease your good credit history. Getting any new credit in the future will be much harder.
Where To Now?
Realizing the need for a good credit score and history is essential. If you have a stable income, now is the time to start building your credit history. You will likely need it more than you realize. Start off slowly, get a credit card, and once you have credit accounts, be responsible with them. All of this will make you appear more reliable and trustworthy, and getting credit will be that much easier. Building and maintaining a good credit score and history is the best thing you can do for yourself.
What are your tips for a great credit score? What are some ways you’ve worked on improving your credit? List some of them below, and let’s discuss.