One thing they don’t teach in school is how to build and maintain good credit, so it’s easy to get in over your head. Building and maintaining a good credit history is essential to being able to borrow money when needed.
A good credit score will allow you to:
– Obtain favorable rates on loans
– Gain approval for rental housing
– Finance a home or vehicle
– Improve your chances of employment
– Lower your insurance rates
Some people think that if they just pay cash for everything, they’ll avoid getting into trouble. While it’s true that coming out of pocket will ensure that you always live within your means, it will do nothing to increase your credit-worthiness when it comes to applying for loans or even applying for a job. Some might argue that it is suspicious for you to have no financial footprint at all. You’ll also forgo some of the advantages of using credit the smart way, like earning travel discounts or rewards and receiving cash back from purchasing things you already need anyway.
How Can I Begin to Build Credit?
The easiest way to begin to establish a credit history is to get a credit card or two. At first, you may receive offers for a secured card, which has a credit limit based on the amount you place into an account, or a basic credit card with a low credit limit and higher interest rates. A secured card is generally an easy way to get started and it will help establish your credit. They do, however, generally require an initial deposit of anywhere from $300 – $500 to get started, putting them out of reach to many first-time borrowers.
A ‘starter card’ that has a low limit is an alternative first step toward building credit the right way, and it’s the first brick in your wall of future financial security. Once you prove your trustworthiness with your credit issuer, it will open the door to credit limit increases and improve your chances of obtaining more favorable interest rates and rewards. For example, if you have a card with Capital One, there are steps you can take to increase Capital One Credit limit. Likewise, if you use another credit card, such as Discover, there are similar things you can do to increase the limit on your Discover Card. This will allow you more flexibility on purchases and increase your emergency buffer to pay for unexpected expenses like medical bills or car repairs.
Here are the top five ways to build your credit using credit cards:
1. Shop around. Don’t just take the first card you’re offered; choose one or two from companies that have a good national reputation, and get the lowest interest rate possible for your situation. Try to find a card that has a fixed rate, rather than a variable rate, which can cause your monthly payment amount to suddenly go up when the higher rate kicks in after the trial period.
2. Use your credit card. If your just get a credit card and stick it a drawer, it’s not earning you anything, and it may even hurt your credit score if you have inactive open accounts.
3. Don’t exceed your credit limit. Your credit card utilization counts for 30 percent of your credit score. Having your card go over the max can lower your credit score by 20 – 70 points for each incident. The most favorable ratio is to keep your credit card usage at around 30 percent of your total spending limit, or pay it down to that amount as soon as possible after a big purchase.
4. Never make only the minimum payment each month. Not only will that keep you balance high, it will take longer to pay off your debt.
5. After six months to a year of exemplary usage, you may be offered a credit limit increase. If not, you can contact the company and plead your case; shoot for an increase of about 10 to 25 percent.
Credit is only bad if you don’t learn how to properly utilize it and do not avoid common mistakes. Whether you’re just starting out in life or you’re trying to rebuild your credit after a shaky start, you’ll steer clear of the financial pitfalls by using a little judgment, a little restraint and following proven guidelines to get back on solid financial ground. Establishing good money management techniques will give you a better chance of having an exemplary credit history, which is the basis for home ownership, access to business funding and having the ability to enjoy life with a little more security.
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