A Beginner’s Guide to Building Good Credit
Everyone seems to know bits and pieces about credit. People tend to know a high credit score is good and low credit score is bad.
But not many people seem to understand what credit actually means or how to start building good credit.
This post will give you some of the basics on what credit is and some of the tools you can use to start building good credit now.
It’s important to understand the first time you use a credit card is when your lifelong credit score journey begins. Every time you apply for credit or a loan – or make payments on those credit cards or loans – you build a credit history.
No matter how young or old, your credit history will follow you for life (what a scary commitment!)
But fear not.
We’re here to suppress your fears by taking you through the easiest ways to maintain a good credit score.
Let’s start with the basics. Your credit history is tracked five ways:
- The number of times you have requested credit
- The number of accounts you open and close
- Your payment history
- The amount of credit or debt you have
- The amount of credit available to you
All of these numbers are swallowed up and churned out as one number: the FICO score.
The Fair Isaac Corporation calculates the FICO score, and it tells you how your credit is doing.
The breakdown of the calculation goes as such:
- 35 percent of your FICO is payment history.
Remember, on-time payments build your credit score and late payments hurt it!
- 30 percent of your FICO is a comparison between the amount you owe and the amount of credit you have available.
- 15 percent of your FICO is based on the length of your credit history.
Basically, the longer you keep your accounts open and active, the better.
- 10 percent of your FICO is based on the number of accounts you have opened.
We are tempted to say “the more accounts, the better” but that really isn’t the case. We suggest you open accounts based on what you need, not just to improve your credit score (because chances are if you do that, it won’t improve).
Also, something people don’t know is opening a new account temporarily lowers your credit score for 12 months (don’t panic because it’s only temporary!)
- 10 percent of your FICO is based on the type of credit you use.
Lenders like to see a mix of the types of accounts you hold.
The three accounts you can hold are revolving accounts (basic credit cards, store cards, etc.), installment accounts (automobiles, mortgages, loans, etc.) and open accounts (home utility, internet, cable, cellphone, etc.)
The more diverse you are in your credit, the better!
“You should be able to take on
the credit commitment so many fear.”
Now that we have broken down the basics, it’s time to see how you can build build good credit from the get-go.
1. Make sure you automate regular payments.
We can’t stress how important this is (and speaking of stress, it takes a lot off you!)
There is no reason to miss a payment that you are going to have to make consistently, whether it be every week, month, year, etc.
2. Try to lower the balance owed on revolving accounts.
Aren’t you glad you know what that is now? Do this by the time you have to pay your credit bill.
Having a large amount of unpaid debt never helps. Also, this way you minimize the interest you’ll have to pay.
3. Pay off your debts.
Don’t just move them around your accounts. This is quite obvious advice, but it’s not always followed.
Another quick tip to keep in mind is you cannot improve your credit score by closing unused accounts. If you owe the same amount on fewer open accounts, it may actually lower your credit score.
4. Check for errors that may be dragging you down.
Grab a copy of your credit report and check for any errors! If there are mistakes, you can dispute them. If they are removed from your credit report, then you just earned a bump in your credit score.
5. Build some goodwill with your creditors.
Being a long-term customer could grant you some trust, and sometimes creditors will not have a problem taking off a late fee or two.
6. Stay on top of your credit reports.
You are at perfect liberty to dispute and negotiate past debts (which not a lot of people do). Monitoring your accounts also helps prevent identity theft.
7. Check your credit limits.
Sometimes your lender will show a lower limit than you actually have. All it takes is a phone call to your lender. Ask them to update your information and voila, you now have another bump in your credit score.
8. Spending heavily can hurt.
Even if your bills are being paid on time, spending a lot of money on your account can hurt your credit score.
The comparison between how much you owe and how much credit you have available accounts for 30 percent of your FICO score. This is called credit utilization.
Generally, your credit utilization should not go over 75 percent, though you should aim for around 30 percent. FICO has reported the best of the best have it at just 7 percent!
So there ya’ have it, eight useful tips that will help you build good credit. Armed with all of this information, you should be able to take on (and beat) the credit commitment so many fear.
Photo source: jeffbullas.com