The Ins and Outs of Building a Good Credit Score
The Lifelong Battle
Penny pinching at the grocery store with your coupons and budgets may seem like a tactful way to be financially sly, but successful financial management goes beyond the everyday savings. Like it or not, you are going to face “credit-critical” decisions over and over throughout your life: your mortgage, automobile, credit cards not to mention employers and cell phone companies. No one likes to conform these days, but when it comes to your credit score there are inevitable repercussions that arise from avoiding it.
While there are certain rules required to start out, the road widens as you advance and the payout multiplies. Once you have proved yourself by going through the establishment phase, you can apply some brilliant strategies to work the system in order to improve your credit without losing that hard-earned green. Whether you are young and establishing credit for the first time or trying to recover from an agonizing history, these steps are for you. It is important to understand how the system works in order to work the system, but remember, you have to walk before you can run!
Obscure Facts About Credit Scores
It is interesting to learn what people think their credit scores are based on. While some are correct, others are completely overlooked or wrong. The three credit score companies are TransUnion, Equifax and Experian. Each has their unique formula to determine how likely a person is to default on a line of credit and each considers it a “trade secret”. People are surprised to learn that you are actually ranked against other people in the country before your final score is determined. If you have defaulted on a loan or have committed some other action that suggests unreliability, you are automatically grouped with others who have similar histories. Within this margin, your score is determined based on smaller factors. Time to bring out the competitive drive, because your neighbors are competing with you!
Few people know where to start other than applying for a credit card or loan. This can end in either the inability to be approved or an extremely high interest rate. The amount of money that can be saved by a person with a higher credit score reaches thousands of dollars. Monthly payments seem like small differences, but a small victory each month can add up. For example, the difference between the best and worst credit scores for the mortgage and automobile loans add up to huge savings. In the chart below, there is a $10,500 difference for the car, and there is a $64,440 difference paid for a home loan!
What would you do if you could escape having to pay that extra money? Taking it another step farther, what if you actually took that money and invested it to where it is earning interest rather than accumulating it?
- Credit History Length: The longer you live, the better your score is!
- Payment History: Always pay on time and the full amount.
- Outstanding Balances: Obviously, if you have a high amount due you are a higher risk.
- New Credit and Utilization Rate: If you suddenly have five credit cards with no activity, this can hurt your score.
- Inquiries: Even having your credit score checked too many times by outside parties can hurt you!
- Cancelled Cards: Do not cancel a card because you do not use it. Unless you are forced to cancel it due to unique situations, canceling a card can hurt your score.
- Types of Credit:When building your credit, try to do so in a variety of ways.
So… What Do I Do?
The United States is all about extremes. There are people who live way beyond their means, charging everything to credit cards and paying ridiculously high interest rates for the rest of their lives. Then there are opposites such as Dave Ramsey. He has drilled into the minds of Americans the importance of saving money and being financially disciplined. While I agree with him, I was shocked to discover the extent of his extreme tactics. It has been reported that he has catastrophically poor credit because he pays for everything in cash! Credit scores are all about balance and strategy.
Establishing and Building Your Credit Score
1. Check your credit history report
- You have got to know what your name is linked to and where you stand. It’s like stepping on the scale before starting a diet… it’s intimidating, but necessary to motivate and improve. Not only this, but it is crucial for monitoring identity theft. While you can use one of the major credit scoring companies, I would suggest Credit Karma–www.creditkarma.com–its free, secure, and tracks your score changes over time. You can see all of your credit factors, get advice and receive periodic updates.
2. If you have no credit established, it’s time to get going!
- Remember, the length of your credit history can help or hurt you.
- Also, remember that you should not cancel a credit card if you find that your record shows one. Call the company and report the card as “lost” if you no longer have it. They can send you a new one! Make sure that you are in control of all accounts tied to your name!
- Apply for a “secured loan” or “secured credit card” at your local bank. For example, let’s say that you have $500. You can deposit the $500, which will be matched by the bank as a secured loan. From there, you can make it simple and deposit the additional $500. Then set up automatic payments toward the loan from that account and let it pay itself off. While you may pay a small amount in interest, you are displaying the ability to consistently pay on time, which builds your credit.
- If you can be approved for a credit card, make sure there are no annual or hidden fees. Treat this like a debit card whenever possible! There are actually ways that you can set up automatic payments directly from your bank account each time you use your card. (Ask your bank for details on their options)
3. Time to take it to another level.
- Now that you have built your credit to a fair level, it is time to take advantage of the system. You will most likely have creditors begging you to sign up for their credit cards… only use it when you have the money to back it!
- One way to really throw a wrench in the system is to find a card with a lot of rewards or money back. Use it for your everyday dealings, then pay it off immediately as if it is were a debit card. (Mind over matter!) You will reap all of the rewards, build your credit and never pay them a dime.
- For other tactics, check out Credit Karma.
- Remember, things are never as bad as they seem and knowledge is power. If you are in a rut, now you know what to do. Baby steps grow into strides, which grow into leaps, which can lead you into you soaring high in the sky. If you do what you need to do now, you can let the credit card companies fly you to your favorite vacation spot as a free celebratory gift to you.
Swappel guest post by Crystal Reeves
Crystal Reeves is a recent graduate from Oral Roberts University where she studied finance. She has played competitive golf at the amateur, collegiate, and professional level, for 14 years. Crystal has a passion for helping people reach a wholesome state of wellness in multiple areas of life such as financial, physical, spiritual, emotional, etc. In her spare time she enjoys writing (music, stories, articles, etc.), singing, and playing guitar.
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