Building good credit….it’s a bit of a modern twist on the chicken and egg conundrum – it is harder to get credit until you have a history of repaying credit.
While, at first, it seems like an impossible situation, take heart. Because building credit, at that good credit, is crucial to your obtaining credit.
From a lender’s perspective, your history of repaying credit is a big factor in understanding how you may behave with future credit obligations. Don’t have a record of making payments and, effectively, managing credit? Then how will a lender know you’ll pay them back on time, if at all?
You’re a risk. It is likely that you could be turned down for a loan, or charged a higher interest rate until you can prove you’re creditworthy.
No credit (or bad credit) can impact every aspect of your life – keeping you from getting a home, an education or even a job.
Sounds tough? Don’t be discouraged. Armed with a big, heaping dose of patience, you can be in control of building your credit record.
We’ve done our homework and come up with some suggestions on actions you can take to achieve your dream of establishing a good credit record.
1. Start small.
Establishing good credit doesn’t happen overnight. What can happen overnight? Going on an account-opening binge! Don’t do it. Be smart. Select a credit card with no annual fee, a modest spending limit and a fixed interest rate.
2. Pay on time. Every time.
Almost one-third of your credit score depends on if you pay your bills on time, all the time. You don’t have to miss a monthly payment to cause long-term damage to your credit score. When you’re “new” to credit, even just being late on one payment can set you back and result in your taking longer to build the good credit you need to get a car, a student loan, a house or that dream job.
3. Let your accounts age.
Just because you don’t use that no annual fee credit card anymore doesn’t mean you should close that account. In fact, keeping your oldest accounts open works in your favor. Your old accounts help to increase your credit “age,” and that’s a very good thing in terms of establishing creditworthiness.
4. Use only a small amount of your available credit.
So you’ve been approved for $2,000? That doesn’t mean you go out on a $2,000 spending spree. It’s often suggested you use less than half of your available credit. But it’s even better to use less than 30 percent of the credit you’ve been approved for. Lenders compare how much credit you are using to how much you have, and they see maxing out – or even coming close to your credit limit – as one of the most irresponsible ways of (mis)using credit.
5. Pay off your balance.
Channel your parents’ and grandparents’ wisdom: Don’t use more credit than you can afford to repay each month. Spend within your means.
6. Get off to a secure start.
One way to build a credit history from scratch is with a secured credit card. This type of card is secured by collateral consisting of funds deposited by a consumer, usually a minimum amount of several hundred dollars, the amount which becomes your credit limit. Your responsible management of this account builds a history with the credit reporting bureaus, and facilitates future access to other types of credit.
When it comes to building your credit, a little discipline can go a long way.
You can keep tabs on your credit by visiting AnnualCreditReport.com, or through one of the three major credit bureaus, EquiFax, Experian, andTransUnion. Each of these organizations’ websites are chock-full of helpful information. After all, once you’ve built your credit, the important thing is to keep it in good standing!
Happy good credit building!