Credit is something everyone has heard of. We all find out as we grow up how important it is. But, are you one of those people that’s confused about how to build it?
You are not alone. Last year alone, 40% of America had no clue how credit scores work. I am sure you are here for that reason, the reason for finding out how to work on yours.
Let’s jump into the basics of how this credit mystery works. I will help you on your journey with some quick and easy tips. Here we go!
What is Credit Anyways?
In simple terms, credit is the ability to borrow money with the expectation of paying it back.
What comes to your mind when you think of credit? Credit cards, loans, a mortgage? What about your phone or cable bill?
Companies that provide these services expect that you will pay for them every month. That’s why credit is important! If you do not have good credit, then these companies that offer these services will not lend them to you.
To build credit you need to show you can pay off all your bills on time. Paying all your bills on time builds credit. Your score will go up or down depending on this factor!
A good credit score equals credit cards, apartments, car loans, and mortgages. The better the credit score, the better the “interest” on these loans.
What is “interest” you may be asking? Interest is the amount of money that you have to pay back for borrowing money. The better the credit the less you have to pay, yet, the worse it is the higher it will be.
So now we have figured out that good credit will save you money. So now you may be thinking, “How do I build my credit?”. Let’s get to it!
How to Build Credit
The most effective way to do this is to get a credit card. The thing about this is how you use it. Never spend more than you can afford, and always pay it off every month to avoid having to pay the interest.
There are four basic ways to use a credit card to build your credit. Here they are:
- Being an authorized user
- This is for all the young people that are reading this. Ask your parents if you can become an authorized user of their card. It builds your credit, but keep in mind your parents are the ones paying the bill!
- Secured Cards
- This is the best way for people who have bad credit. You get a credit card but you put a deposit down. Your interest rates are higher so make sure you always pay it off.
- Student Cards
- These are credit cards for students. They have low credit limits. It helps to avoid them getting in debt.
- Store Cards
- These are cards that you can get through most stores at the mall. The only thing about these cards is they are only usable at said stores. They do have low limits as well.
Now that you know the basics about credit cards! That isn’t the only way to build credit. Here are some other options:
- Student Loans
- In case you are trying to further your education, or want to go back to school this is a solid option. The downside is they rack up and have a high-interest rate. The plus side is you leave with a college degree.
- Auto Loans
- This isn’t an ideal method of building your credit. The reason I would say this is you may not need a new car. If, you do need one this is a viable option. Not only would it be an upgrade, but you’d be able to work building your credit as well.
- Ask Companies to Report your Service Credit
- Bills such as cable, utilities, and your phone bill are not always reported. So you may need to call and ask them to report them in. They may seem small, but they do show that you have been paying your bills on time.
I discussed the differences between good and bad credit. We have gone over ways to build your credit. Now I want to go over how your companies calculate your credit.
How Credit is Calculated
Your credit score is important. It is rated by a system called FICO. In short, the higher the score the better your credit. Here are the five factors that are used in determining your score as well as the percentages of how they impact it.
- Payment History (35% of your score)
- Make sure everything is paid on time
- Usage (30% of your score)
- How much of your available credit do you use? General number to aim for is under 30%
- Length of Credit History (15% of your score)
- The longer your accounts have been open, the better it looks
- Recent Activity (10% of your score)
- Don’t apply for too much credit. They look at anything that seems egregious in a 6 month period.
- Credit Mix (10% of your score)
- What kind of loans and lines of credit do you have? If you have a healthy mix of these, lenders are more likely to approve loans.
I discussed the differences between good and bad credit. I have went over the ways to build your credit. I have been over the ways your credit is calculated. Now let’s go over the ways to increase your credit score!
How to Increase Your Credit Score
So the moment you get your credit card or loan, you will start making your payments. Assuming your payments are on time you will start building your credit up bit by bit. Over time it will increase. Here are some basic tips to get your credit up in closing.
- Correct all the errors in your credit report. Do not forget you can fight old claims. Also, sign up for CreditKarma. Check it once a month. They will help guide you in fixing your score.
- Do not apply for a bunch of cards at once. Every time you apply for something that involves your credit, it makes an impact. Space them out once every 6 months per single application.
- Keep your total balance under 30%
- Never close your accounts. Even if your card is paid off, keep using it. Remember the longer your accounts are open. The better it affects your credit.
I hope you enjoyed this and found it beneficial. Till next time!