Posts Tagged ‘debt reduction’

Building Credit from the Ground Up

Your credit is important. Having good credit can help you with more than just getting loans and great interest rates. Some jobs require a good credit score. Additionally, a good credit score can be your key to getting the apartment that you have been looking at. Good credit is important and so you need to start building it as soon as possible.

To effectively build your credit score will need to arm yourself with a few key pieces of knowledge. First, you need to know how to get started. This may be difficult as many companies are a little apprehensive when lending to first time borrowers. You also need to understand how a credit score is calculated. By understanding both how to start and how a score is calculated will help you to build the credit that you need.

Starting the Journey

Building a credit score isn’t a quick process. It can take years of good bill paying and building up accounts to get to your dream score. Be patient as it will take time. You will have to start with smaller credit accounts and then build up larger borrowed amounts over time. Of course, getting that first account or two can be tricky. If you need some help getting started, these ideas may be what you need to get that first loan.

Consider a Co-Signer

A co-signer can really help you get started on the path to great credit. With a co-signer, you may be able to get a loan that you couldn’t qualify for on your own. They may help you to get those initial couple of loans. A commonly unconsidered benefit is that when you get a co-signer that they can actually help you to boost your score. Sometimes with a co-signer, your credit score can ride on the back of their score. This leaves you with a better score even without the history. Be careful choosing a co-signer because the converse can also be true. In some instances a co-signer with a low credit score can actually lower your score quite a bit.

Get It at the Right Time

College is a great time to apply for credit. Lenders are more willing to lend to students than they are to lend to young professionals. Many feel that as a student, mom and dad are still there to back you. If you start applying for credit before you get out of college, you have a better chance of building your scores. Don’t wait, but use caution so that you don’t get into any trouble.

Gas and Store Cards

Gas and store credit cards are some of the easiest to get. If you need a first card, look to these avenues for the most success. These accounts often carry high interest rates, so don’t go overboard on your spending. Also make sure that you make your payments on time consistently to ensure that you are building your credit. These make a great stepping stone for later getting a major credit card.

Try a Secured Card

Many credit cards are unsecured, meaning that the lender has no recourse should you default on your loan. Many lenders also offer secured cards as an alternative for those with no credit or bad credit. A secured card requires the borrower to put money into a holding account and then to borrow against the money using the card. Before you sign up for a secured card, make sure that there is a way to change to a traditional unsecured card once you have proven your ability to consistently make payments.

Checking and Savings Accounts

Sign up for a checking and a savings account and start to watch your credit grow. Many do not realize that these accounts can help your credit score. Remember that the longer you have an account, the more it can benefit you. Sign up now and plan on keeping the account for a long time.

Small Loans Help Too

You don’t have to get a credit card to start building your credit. In fact, a couple small loans can help as well. It is generally best to get a short term loan for a small amount so that you can pay it off quickly and start building credit. Your credit score will benefit from having multiple types of credit on it, so don’t feel that a credit card is your only option.

Use Your Cards- In Moderation

Once you get your initial couple of credit cards, use them. Don’t build up a big balance. It is a good idea to keep your purchases to amounts that will be easy to pay off each month in full. Do use them however, your card company may not report to the credit bureau if you never use the card, so use it and pay it off regularly.

How is My Credit Score Calculated?

There is no one set formula for calculating a credit score. This is primarily because a credit score is built using five basic building blocks. These blocks are your payment history, your debt, length of time, type of accounts and number of accounts. Each factor influences your overall score. Most important however is your payment history and amount of debt. These two factors alone make up more than 2/3 of your total score. The other 3 segments comprise the final third of the score.

Payment History

Your payment history plays a huge role in determining your credit score. In fact, this one element alone makes up about 35% of your total score. One late payment can really impact your score for the negative. The higher your score, the worse the damage. If you have a high score, a late payment can drop your score as much as 100 points.

Amount of Debt Carried

Your creditors will also examine the amount of debt that you carry when determining your credit score. Creditors want to know that they will get a return on their investment when they lend to you. They don’t want to lend money to those that have maxed out credit cards and a lot of debt. If you already have a high amount of debt, make debt reduction a major goal.Don’t get into more debt than you need and keep your credit card balances below 50% of your total available credit. This will help you keep your amount of debt carried score as high as possible.

Credit History Length

A good 15% of your total score is determined by the length of time that you have had a credit history. Having a long credit history shows that you are reliable. As you cancel credit cards and consolidate loans, remember it is in your scores best interest to keep older accounts open because they demonstrate and uphold the length of your credit history.

Types of Accounts/Credit

There are two main types of credit shown on your credit reports: Installment and Revolving. An installment account is something like a mortgage where you pay a set loan amount each month. Revolving credit payment change as the balances change. A good example of this is a credit card. Optimally you should have a good mix of both types of credit.

Inquiries and New Accounts

If you suddenly go out and get several new credit cards, the credit bureaus are going to wonder why. Each new account and inquiry to your credit report will hurt your score a little. Be careful when opening new accounts and only open the accounts you need. It is best to open new accounts over time instead of in one large burst.
Using these basic principles, you will be able to better determine strategies to raise your credit score. Bear in mind that consistently making your payments on time is important as well. Monitoring your score and watching all five elements will help your score stay its best and keep growing.

The Importance of Good Credit

Remember that good credit is important. Your future creditors need to be able to trust you and they build this trust on your past history. Getting started is difficult, but once you get started you need to remember the other factors that determine your score as well. Good credit is built, and no one starts off with it. With some patience and a little perseverance, you too can get a great credit score.