In the United States and other developed countries, having good credit means everything – buying a home, a car, and any other capital expense requires having a good credit score. Basically, a credit score shows how creditworthy you are and is used as a tool to determine how high or low of an interest rate to impose on any future loans you wish to take out.
For new adults, building good credit is a never-ending cycle of heartbreak and disappointment – you need good credit to get a loan, but you can’t get a loan without good credit, and so on. Don’t worry, there are several ways to build a good credit score from scratch. Assuming you are eligible for a secured credit card, credit-builder loan, have become an authorized user on someone else’s card, or are paying student loans, there are several things you need to know about how these the keep a good credit history. This article will focus on seven things that people with bad or no credit history should take into account.
1. Only borrow what you can pay back
This really goes without saying: if you can afford to make the payments, then feel free to purchase it with credit. If you can’t, then don’t put yourself in financial misery by forcing yourself to pay much more than you can afford and risk making late payments. When you make a habit out of buying what you can afford, future lenders will draw the conclusion that you’re a responsible borrower. That way you’ll find it much easier to take out low-interest loans in the near future.
When you are creditworthy enough to take out loans, make sure that you only take out what you can afford to pay back, regardless of the maximum loan amount that your loaner says you qualify for. To do this, make a monthly or yearly budget to see how much money you spend and how much you can save to pay back loans on-time.
2. Do not max out your credit cards
If you have a $5,000 credit cap on a card, don’t charge that much to your card. Even coming close to the amount can be considered irresponsible by future loaners, especially if you can’t afford to pay back the balance by the end of the month. Loaners are prejudiced towards people who max out their cards, and the assumption they make is that that type of person will most likely struggle to pay off their credit. To be safe, stay below the 50% mark of your total credit.
3. Use only one credit card
First-time credit card users will be tempted to accumulate as many credit cards as possible within the first few years of being eligible to use one. Don’t fall into the trap of using more credit cards than you can handle, especially when you’re just starting to build a good credit score. The more credit that’s resting on your shoulders, the more cards you’ll need to pay off balances of others, and the quicker you’ll drown in your accumulated credit. In addition, taking out several credit cards too quickly may cause a drop in your credit score.
4. Pay your balance in full
Remember to charge to your credit card what you can afford to pay. That way there is little risk of being able to pay the full balance of your credit at the end of every month. Paying off the balance each month shows lenders that you’re fully capable of paying bills and fulfilling obligations to creditors. However, there are exceptions to this rule which we will discuss on point 6.
5. Pay on time
Not every monthly payment will be listed on the credit report issued to credit bureaus, so they won’t have any effect on your credit score as long as you’re paying them before incurring penalties. However, if you’re delinquent in paying bills, then the amount may be automatically drawn from your credit account, meaning that you’ll have to deal with collection agencies to pay back the sum of money taken from your account. To avoid the trouble of collection agencies and negative credit reports, pay off all your bills on time.
6. There’s a right way to carrying a credit balance
That’s right. If you can’t make the full payment at the end of a month, then at least pay more than the minimum requirement needed to keep creditors at bay. Carrying a credit balance to the next month isn’t always a bad thing, especially if you make payments in a timely manner and the payment is greater than the bare minimum at the end of every month. However, it’s important to keep your total credit balance below the 50% or even 30% mark if you can’t pay the entire balance in full.
The longer you’ve been given credit, the better your credit score will become. Leave your oldest accounts open and let them age like wine – the longer they’re open, the better your credit age and credit score. Closing the account doesn’t mean your credit report is immediately removed, but the credit bureaus will eventually drop and forget closed accounts.
These are just seven tips you should keep in mind when attempting to improve or build a credit history. Remember that having good credit history will help you tremendously in the future – lenders will impose reduced interest rates on any loans you take out since you’re not profiled as a high-risk borrower, you’ll have greater negotiating power when discussing loans with banks, and you’ll qualify for larger loans which can help in purchasing a home or funding your own business. Having bad credit history goes against you and labels you as untrustworthy to basically every organization in the financial service industry. However, having poor or no credit history isn’t the end of the world. There are several ways to start building trust with creditors which can reverse the effects of your bad or nonexistent credit history.