Credit scores determine how creditworthy you are and have a direct bearing on your applications for credit – be it for an auto loan, credit card or mortgage. Those with high credit scores get their loan applications approved faster and the benefit of a lower interest rate as well.
Crucial to Have Good Credit History
Your credit score is a pretty important little set of numbers, as it determines whether or not you can buy a house or car. In some cases, it can even affect your employability.
In order to take out a loan from the bank, you need a high credit score – the higher, the better. A high score means that you’re low risk and that you’ll be more likely to pay back loans. If your score is low, however, you’re going to have big problems.
You’ll be deemed very likely to default on loans and banks won’t want to touch you with a barge pole. However, if you’re not drowning too deep in debt, there are ways of raising your credit score. Here’s what you can do.
Good Credit Score Can Ease Your Life
Building up a credit history is crucial to ensure a good credit score. The credit score dictates most financial matters, including the borrowing power of an individual. For those seeking to apply for a house or vehicle loan, it is very important to build up a credit history while they have the chance.
Most people start building up their credit history while they are still college students. It is good to get an early start as it provides a massive boost to the credit score. Follow these steps and you will be on your way to building up a good credit history.
Establish a credit history first
Those who have no prior history of borrowing need to establish a credit history first. The easiest way to do this is to apply for and get a secure credit card.
This card can be set up at the bank where you hold a checking account by earmarking funds towards the card limit that is granted to you. This card works pretty much like a check card and does not permit you to spend over the pre-set limit.
However, by making monthly payments promptly, you can establish a credit history as your card spends and payment behavior are reported to the three Credit Bureaus.
Begin with one credit card
You will find many credit card companies offering you pre-approved credit cards with high limits. Since you do not have much of credit history, the interest rates on these cards are very high.
However, the temptation remains to stockpile on these no-annual-fee credit cards. As far as building a good credit history is concerned, that would not be a very good move. Piling up such kinds of credit cards will give a credit history, but not all of it will be good.
Start with a standard credit card and stick to it; it’s easier to build up a credit history when all your credit transactions occur via the same account.
It’s wise not to have a thick stack of credit cards, as this will impact negatively on your credit score. According to MSNMoney.com, even applying for multiple cards (when you just want one) will show up on your record, so you need to be very careful.
You’ll look like a credit seeker and banks will avoid you. MSNMoney.com also advises that you always use less than 10% of your credit limit, as the less credit you use the better.
Keep your credit card accounts open
Closing any credit card account has a detrimental effect on your credit score. Even if the credit account has no balance owed and the card has never been used, closure of a credit card account is bad news for those building a credit history.
A credit card account that is left ignored for a long time is automatically shut down by the credit card company and does not affect the credit score. In addition, the longer you have a credit card account for, the stronger your credit history gets.
Keep all your cards active
If you already have a lot of credit cards, don’t close any of them, as this will lower your credit score. Personal finance guru Suze Orman advises that you keep all of them active and even start using the inactive ones.
You should continue to use them, but make sure you pay all your credit card bills on time each month and, whatever you do, don’t go over the limits! You need to show the bank that you use your cards responsibly.
Forbes suggests that you rotate your cards by using one each month and that a number of cards will help you to establish a longer credit history. The key is not to be reckless with your cards but to use them wisely.
Retain old credit card accounts
Your credit score improves with the age of your credit card account. Having old card accounts in good standing would be a huge positive when it comes to your credit score. So, you can keep using these old cards occasionally to keep them active, even if the reward points offered are not attractive.
Borrow and repay
Simply having a credit card account is not enough to build up a credit history. It will provide a temporary boost to your credit score, but does nothing in terms of building a good credit history.
You have to borrow (charge transactions to your credit card) and repay (make monthly payments) to keep the credit card active; the amount of transactions is what really helps build up a credit history.
Charge less, pay full
The best way to build up a credit history is to ensure that no balance is carried over from month to month. Only make credit card transactions that you know you can pay for in full at the end of the month.
Making only minimum payments and racking up a balance is the last thing you should do; make full payments for every credit card statement.
As for the credit limit, try to stay well under it. A maxed out credit card sets off alarm bells in your credit history and brings down your credit score.
Make payments on time
Some people only care about how much they have to pay, irrespective of when the deadline is. Late payments trigger higher interest rates and are the equivalent of a black mark in your credit history. Don’t just pay in full, pay on time as well.
Pay your utility bills on time
Defaulting on bill payments would lead to additional fees and charges besides lowering your credit scores. An easy way to avoid defaults is to set up mandates on your checking account to pay off the bills in full by the payment due date.
Avoid revolving credit
Paying off your credit card balances and other dues (like mortgages and auto loan obligations) in full by the payment due date helps you establish a good payment track record and improve your credit score.
Avoid shopping for credit
Too many inquiries on your credit report made by prospective lenders would be considered negative. It is better to understand your eligibility first, narrow down your options and apply judiciously.
Restrict your spend on cards
It is better to confine your spend on the credit card to less than 40% of your spending limit. This reflects responsible behavior on your part. Once you have established a reasonably good history, you can apply for additional cards and use them.
Alternatively, you can use your check card for your shopping once you reach the threshold of 40% of your credit limit. Spending all the way till you exhaust your credit limit may pull down your credit score.
Check your credit record
First thing’s first; you can’t fix a problem if you don’t know the extent of the damage. You can check your credit record for free through an official credit bureau. Even if you’re certain that your credit record is fine, you should still check it from time to time, as identity theft can give you some nasty surprises.
Forbes recommends that you avoid any websites that offer free checks, as these usually aren’t free. Always go through official channels. Your credit history is also important to look at because a short history will mean a greater effect on late payments.
All you need is one late payment for your rent or cellphone subscription and it will have a severe impact on your history! (Forbes.com)
If you follow these tips you should be able to raise your credit score. It will take some time, but it will pay off in the end, especially when it comes to taking out a big loan.
Some employers even check your credit scores in order to deem whether or not it will be a risk to hire you! So, it’s vital that you know what your score is and educate yourself about how to raise it.
Establishing a Credit History Takes Time
Making use of the above tips will help you reach the goal of having a good credit score. It would be worthwhile to get a copy of your credit report from Experian, Equifax and TransUnion once every year (It is available free once every 12 months) and review the information provided there.
This report would only contain credit history and not provide you with the credit scores. If you observe any discrepancy in the information provided, you should take it up with the lender who has reported that information to get it corrected.
It is worthwhile to invest time on this activity as your potential employer/banker would actually check your credit history as a part of the screening – be it for a loan or a potential job offer.