Credit is no longer a financial option; it’s a requirement. In today’s economy, you need credit if you want to get a house, a car, or an emergency loan for medical needs or education. The downside is that you need a good credit score to qualify for more credit and the only way to get a good credit score is to use credit. Sounds confusing? With the following six steps, all of which are easy to follow, you’ll have no trouble building your credit.
First, you need to know where you stand and for that you need to get both an annual credit report and your current credit score. There are three services that provide these: Equifax, TransUnion, and Experian. Law dictates that these services give you a free credit report every twelve months so getting that document shouldn’t be too difficult.
The downside is that the report won’t show your credit score. Most of the time you need to pay a small charge – often around $10 – to have the score included. Remember that credit scores range from around 300 to 850, the higher number indicating a better score.
Next step is to list down all your options. Do not immediately go for the first credit card offer or loan offer you qualify for. People with little to no credit history usually find this step difficult but there are banks and credit unions that have special programs to address this. They can help you establish credit without having to deal with insanely high interest rates.
Some of these starter accounts will link your credit to a certificate of deposit (CD). This will allow you to use and build credit while still giving you space to save money as well as earn a little more through CD interest.
The third step is the most volatile of all. You need to build credit history now that you’ve gotten the proper credit utensils such as a short-limit credit card. The best way to do this is to use your card for small payments and then pay them in full by the end of the month.
Use your credit card for low-cost groceries, your toothpaste, public transportation, and other small costs. This will make sure you can pay the balance off in full every month’s end. By doing this you are proving you know how to use and pay your credit. That track record of credit use and credit payment adds up to your credit score.
Now the fourth and fifth steps are connected because these are the “don’ts” of using – or in this case, abusing – your available credit.
You’ll want to use credit as wisely as possible. This boils down to two things: always pay on time and always make sure you never go beyond your credit limit. Every time you pay late your credit score drops. Every time you spend a cent over your limit your credit score drops. Compound them together and your credit score will plummet.
The fifth step to building credit is to avoid three common mistakes: you don’t want to apply to numerous creditors and loaners simultaneously, you don’t want to max out your credit, and you shouldn’t close your credit accounts.
Applying to several creditors at once tells them that you’re in big need of cash. This means you might have a difficult time of paying all those loans when the bill comes in.
Maxing out your credit out is a bad idea because it diminishes your score incredibly. It shows you’re unlikely able to fully pay your monthly balance. Keep the available balance low by paying in full and paying on time.
As for the last bit, this is a secret very few people know. The older your credit account is, the better it looks on your report. So, even if you don’t really use a particular credit account anymore just keep it open and in well-condition to boost your score.
Lastly, always monitor your credit report. You will want to know how well you are doing and if there are any outstanding bills you need to make up for. Once you got a decent credit score, keep monitoring it so you never fall into a financial trap that will force you to make rash credit decisions.