Having good credit is crucial for a variety of reasons, including getting a home mortgage or an education loan on reasonable terms and for getting low insurance premiums. Additionally, if you are looking for a job, your employer may check your credit history before deciding to hire you. Even something as simple as applying for a cellphone can be affected by your credit score.
Most financial companies use the industry-standard FICO score—and the three credit bureaus, Equifax, Experian, and TransUnion, also use the alternative VantageScore— as a measure to determine what the risk factor will be in giving you a loan.
If your FICO score is 619 or below, credit issuers will most likely turn you down for loans. Low scores suggest unreliability in repaying loans, and few creditors will want to take the risk. Even credit scores in the neighborhood of 620-679 can make them wary. If they give you loans, you will have to pay higher interest rates that, in the long-term, can end up costing you a lot of money.
A high credit score of at least 680 to 740 will help you get the best loan terms as it indicates you have a record of meeting your repayment obligations. To build such a score, however, you need first to get credit, and that can sometimes be tricky as you will have to prove to banks and credit card companies that you can handle credit responsibly.
Here are four simple steps to build credit:
1. Get a Secured Credit Card
If you have no credit history, getting a secured credit card can be an easy first step to build credit. Many credit card issuers might turn you down if you don’t have a credit history, but they don’t have to undertake much financial risk with issuing you a secured credit card. To acquire this type of credit card, you must pay the company a security deposit as collateral against the credit amount you will charge on the card.
The company will refund the security deposit when you close the credit card account, or it may approve you for an unsecured credit card. Your credit use with this card will help with building your credit score.
2. Pay Pending Payments
To improve your credit situation, you need to catch up with any pending payments and bring all your accounts up to date. If your current financial situation doesn’t allow you to repay everything that you owe, it might help to contact your creditors and work out a payment arrangement with them that is agreeable to both parties. You can also contact a legitimate credit counseling agency and get their aid in creating a workable payment plan.
3. Make Timely Payments
Since your payment history makes up 35% of your FICO score, you want to avoid credit reports stating that you are late with your payments. So, make a point of paying your credit card bills on or before the due date. Setting up automated payment methods can help you to stay on track with all your payments. The same rule applies to pay your utility bills and any other bills as the three credit bureaus receive payment reports of these as well, and it can affect your credit score.
4. Pare Your Credit Card Debt
Keeping your credit utilization low is also essential for boosting your credit score. So, if your credit availability is $5000, your credit utilization has to be 30% of this amount or lower. Using more than that will reflect negatively on your credit score, so it is important to try and stay well below your credit limit.
Building good credit is not going to happen overnight. You will need to be patient and consistent, and keep an eye on the free credit reports that you are legally entitled to receive annually from each of the three credit bureaus. Review these carefully for any errors that might have a negative impact on your credit report. Also, you will need to develop good financial habits. These include paying all your bills on time, not accumulating credit card debt, living well below your means, and creating savings funds for emergencies as well as for your future.
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