Let’s get one thing straight, cash is king. If you have enough of it, you can outright buy a home, build a business or travel the world. But, for many people, throwing down half a million dollars on sight is not so easy. This is when having good credit comes into play.
Credit is a way for people to get the stuff they want in life without having all the money they need to get it. With good credit, you are likely to receive competitive offers, interest rates and down payments. How do you achieve that feat? Well, the first thing it comes down to is understanding the system.
Build Your Credit
The first step in establishing good credit is to make sure you have credit in the first place. Usually coming out of high school, people will not have any credit at all. In order to build this, start off with taking out a small personal loan from a credit union or opening a secured credit card. Don’t make the loan or credit limit too high. You don’t want to overwhelm yourself. Start off slow and work on making payments consistently toward that personal loan or secured credit card. The secured credit card is one that is backed by money you put up on the account as a security deposit. The security deposit is a safety net that usually equates to the credit line on the card. If you skip a payment, the deposit can be used to cover the bill. Secured cards are easier to qualify for because these types of cards require less risk as the lender doesn’t have to be concerned if the borrower will pay. Work on consistent payments toward these type of starter credit builders and you will see your credit worth grow.
Start Keeping Up With Your Credit Report
There are three companies that keep track of credit scores in the U.S., Equifax, Experian, and TransUnion. Every year, each person can obtain their credit reports for free by going to www.AnnualCreditReport.com. In 2020, there has been a spike in identity theft scams with the economy in turmoil and the uncertainty of the future as a result of COVID-19. Because of this, free credit reports are now being offered online on a weekly basis. The offer ends April 2021. It’s important to keep track and compare your credit across all three credit reports. Credit reports contain information about your credit account history, including active and closed accounts with retail stores, banks, financiers, medical facilities and the education loan companies. All of this affects your FICO credit score, which can range from 300-850, with anything less than 600 considered poor and above 700 considered good. The credit report is essential to obtaining low mortgage rates, approvals for unsecured credit cards, job applications, and car purchases, for instance. Oftentimes, people will find inconsistent reporting and can get the error removed simply by reaching out to the credit reporting agency or reporting business.
Be Aware Of What Can Decrease Your Credit Score
While the way to increase your credit score is to open accounts and be consistent with the payments, a quick way to decrease your score is to not make payments on time or at all, or to over extend your credit by applying for too many things at once. Each time you apply for a credit account it results in an inquiry. The inquiry is when the company you are applying to runs your credit report for viewing. There’s soft inquiries and then there’s hard inquiries. Soft inquiries consist of credit card companies checking your credit for pre-approvals to make an offer or when you check your own credit. The impact of soft inquiries is not that much and often falls off the report in less than two years. If that’s too long to wait, then borrowers can have the soft inquiry removed by sending a certified letter to the creditor requesting the removal of the soft inquiry on the strength of the inquiry being unauthorized. Hard inquiries have a much greater impact on your credit score and usually arises when the borrower is applying to make a big purchase, such as a car loan, home or student loan. A hard inquiry consists of a creditor pulling your entire credit report to determine your credit worthiness. Too many hard inquiries on your credit report within a short period of time can cause creditors to deny your application as it proves to be an implication that the borrower is risky.
Use Your Credit Wisely
It’s not uncommon for college students to sign up for multiple credit cards in order to get that free t-shirt or slice of pizza. But, this is dangerous. you should treat your credit like it’s gold. One thing you don’t want to do is co-sign for people who are not completely reliable or trustworthy. Co-signing is the act of adding your signature to an application to support someone’s else’s inquiry for credit approval. If the person renege on payment, this could affect your credit, too. Another thing is to watch out for store credit cards. Usually, they will offer you a deal or discount if you open a credit card. Sometimes, it’s worth it, but most times it isn’t because these types of credit cards have high interest rates. What you want to aim for are credit cards that have a reputation of providing good interest rates and can be used anywhere, such as the American Express or Discover credit cards, for instance. Also, select credit cards that reward you for usage with points. These points can result in free flights, vacations or retail discounts.
The Dreaded Debt-To-Credit Ratio
What a lot of people don’t tell you is that you also have to keep track of how much debt you acquire on your credit accounts. To keep it simple, never let the amount of debt outweigh the amount of credit available. You want to keep your debt below 30 percent on each credit account you have open. That means, if you have an account that has a $5,000 limit, you will want to make sure you don’t use no more than $1,500 toward debt. Maintaining a good credit utilization ratio will ensure that when you apply, you have enough room to include a new credit account to your portfolio. What creditors will do is add up all your monthly debt and divide it by your gross monthly income. Creditors are disenchanted with borrowers who have so much debt, but not enough income to cover the debt.
If you keep these things in mind, it will be a good start to building credit, maintaining a good credit score and getting those things that you always wanted. Now, you’re on the path to building legacy, instead of just acquiring a whole bunch of depreciating assets or liabilities.
