Good credit not only help you borrow from banks and other financial entities with ease, but it can also help with other aspects of your life such as when buying a home, car, insurance, landing a job, deposits on utility bills etc. This is why building good credit is important if you want the financial world to be more friendly towards you. Good credit will save you hundreds of thousands of dollars in the course of your life.
Building Good Credit: A How-To Guide
- Start with getting credit.
Building good credit is difficult when you don’t have credit in the first place. However, this can be especially tough because banks and other financial institutions will need to check your credit history in order to determine whether you can be approved or not. Having no credit can be just as bad as having bad credit since neither proves that you’re financially responsible to handle payments. In order to establish a credit history, here are some of the ways you can do so.
- Get a secured credit card
Secured credit cards are credit cards that require you to deposit a certain amount against your desired credit limit before approval. This serves as collateral in the event you can’t pay your bills on time and will be refunded upon the account’s closure or upgrade. Financial entities are more likely to approve someone with no credit history for a secured credit card as the deposit reduces the risk they take on.
- Become an authorized user
By becoming an authorized user of a credit card, you can help start your credit history, especially when the card issuer reports it to the credit bureaus. Make sure that the account you’re using is in good standing – meaning it doesn’t have a history of late payments and high balances as this can also affect your own credit score if it does.
- Find a co-signer for a loan or credit card
This allows you a higher chance of approval since the cosigner shares the burden and responsibility for the account. Find someone who has a good credit score to open the account with you so as to improve your own credit standing.
- Only borrow what you’re capable of paying
Once you have your credit card, whether it’s cosigned or not, you can now start building your credit history by purchasing necessities and making payments on time. One way to maintain your good standing and build your good credit is to practice borrowing only what you’re capable of paying yourself.
Having a credit card is a responsibility and it doesn’t mean that you can buy all the things you want, even when you can’t afford it. Doing so will not just destroy your credit history but being unable to pay your bills will result in having more debt than you can handle.
To avoid this and help you build good credit at the same time, only use your credit card when you know you can pay the amount you’re borrowing. Don’t spend more than what you can afford.
The same goes for loans if that’s how you started your credit history. Only apply for a loan whose monthly payment is well within your capacity to pay.
- Start off with only one credit card
By maintaining only one credit card account, it’ll be easier to manage your payments and budget as there’s no need to keep track of multiple accounts. Don’t make the mistake of opening up many accounts within a couple of years as this can spiral out of control real fast, ending up with you using more credit than you can pay back.
- Don’t max out your credit cards
Unless you’re capable of paying the entire balance within the month, it’s not advisable for you to max out or come close to maxing out the limit of your credit card. This is because most lenders know that you will have difficulty paying back the amount you borrowed and this can negatively affect your credit score.
Making sure that you stick to below 30% of your entire credit limit is the best way to avoid going into debt and help build a good credit history.
- Pay your whole balance in full and on time
If you’re practicing the habit of only spending what you can afford, then paying off the entire amount shouldn’t pose any problems. By doing so, you’re showing financial institutions that you’re more than capable of paying your bills which is what creditors look at.
Moreover, paying them on time will show them as well that you’re financially responsible and have the capacity to make the monthly payments. Negative reports will reflect on your credit history which is why timely and full payments are best to prove your financial responsibility
- Keep those accounts open for as long as possible
The longer you have your account, the better it will look on your credit history. This is because this will increase your credit age and allow them to see that you’re financially capable and responsible.
This will help build good credit as closing an account doesn’t mean it’ll be removed from your account immediately after closure.
- In case you have a remaining balance, pay more than the minimum monthly
Paying more than the minimum required amount allows you to pay off the remaining balance as quickly as possible. Moreover, when you do so and avoid paying late, this allows your credit balance to remain at a reasonable level, allowing you to eliminate the balance as quickly as you can.
While minimum payments won’t hurt your credit score, this will leave you in debt longer and can reflect badly on you if it keeps your balance above 30% of your credit limit.
How Long Does It Take to Build Good Credit?
There’s no definite time when you can say that you have managed to build a good credit score. The minimum duration which your account needs to stay open and maintained is around six months, after which your credit score can be calculated.
After this period, all you need to do is maintain good spending habits and continue building your credit score.
Aside from this, you can also consult with financial agencies like Credit Star Funding who can help analyze your credit and teach you how to manage your credit, especially if you have bad credit, and improve it.
Top Mistakes to Avoid
When it comes to building a good credit history, it’s undoubtedly much easier to build and maintain a good credit history than to repair it once the damage has been done. Nevertheless, whether you’re doing so from scratch or repairing your damaged reputation, here are some of the top mistakes you need to avoid when building a good credit score.
- Not using your credit card
While it might seem like it’s a good idea to simply not use your credit card to avoid accumulating debt, it can actually be counterproductive to your goal. To build a credit score, you need to maintain at least one active account and this means you need to use it at least every few months to keep it active.
Not doing so will lead to your bank canceling and closing down your account and this can negatively affect your credit score.
- Late payments
As mentioned, paying on time can go a long way to building and maintaining a good credit history. Late payments and other negative reports will remain on your credit report for at least seven years.
Moreover, as mentioned above, repairing your score is more difficult than building your credit from scratch. As such, strive to make payments in a timely manner to avoid negative information reflecting on your credit report.
- Mismanaging your credit and not checking it enough
Not keeping track of your expenses and payments can be a surefire way to a bad credit report. Take control of your finances by periodically checking your credit score and report as well as keeping regular track of your expenses and credit card payments.
While your credit score won’t give you the whole picture, it can at least give you an idea where you stand. Moreover, this will prevent errors from affecting your good credit standing.
Final Thoughts
Having a good credit history can open up many opportunities for you, not just in terms of financial opportunities. This is why building a good credit score is vital if you want to encounter fewer problems when dealing with finances.
Aside from helping you with various aspects of your life, good credit history can also help foster good financial habits and prove your financial responsibility which can serve as a way to gain your financial independence.
