One of the aspects of complete and successful personal finances is having good credit. If you want to take advantage of low interest rates on loans and qualify for the best deals on insurance and cell phone service, a good credit history is a must.
Building a good credit history now can help you out later, whether you want the lowest interest rate on mortgage or whether you just want to be able to open an account with your local utility without paying a security deposit. If you are hoping to build good credit more effectively, here’s what you need to know:
Starting from scratch
First of all, if you’re starting from scratch, it can make sense to become an authorized user on someone else’s account. For this to be effective, you need to be an authorized user on a close relative’s account. If you have a spouse or a parent willing to add you to the account, you can benefit from their good credit habits.
Another way to establish credit when starting from scratch is to open a secured credit card account. As long as you have the cash to use as a deposit, you can obtain a limit of between $250 and $5,000. Your deposit is held in reserve as collateral. “My wife used this strategy to build her credit,” says John Rampton, an entrepreneur and the founder of Due.com. “After a year, she received an unsecured credit card and got her deposit back.”
Using a credit card is one of the fastest ways to build a credit history. Many credit cards report your payment activity to the credit bureaus once a month. As long as you pay your credit card bill on time, you are likely to begin building a positive credit history.
Other moves you can make as you start to build your credit from scratch include:
- After you’ve had a credit card for a few months, get a small personal installment loan from your bank. This will add another dimension to your credit report and help boost your score.
- Make your non-credit payments on time. These accounts might be turned over to collections if you don’t make payments on time, and that can hurt your score.
- Check to see if your utility providers report to the credit bureaus. Some credit reporting agencies are starting to include utility payment information in their models. Paying your utilities on time could help you in the long run.
One of the best ways to stay on top of your credit situation is to create a spending plan and stick with it. When you plan your expenses, and you live within your means, you are less likely to run into debt trouble, which can weigh on your credit. Your best results are going to be when you begin by making good financial decisions. The most effective way to build good credit is to start off on the right foot.
Reestablishing your credit
“Building credit, when you have poor credit, is harder than starting from scratch,” says Rampton. His wife struggled against bad credit when they married. With hard work and effort, though, she was able to recover her credit score from a 400 to a 760. Rampton says the process took about 18 months. “Our work has taken us from not qualifying for a home loan to having very good credit and qualifying for good rates.”
One of the first things Rampton recommends, and one of the first things his wife did, is to check for outstanding debt and pay it off. “Sometimes we move and forget to pay a $50 utility bill or a $100 medical bill,” Rampton says. “These accounts are turned over to collections, where they can really drag on your score.”
Another effective way to boost a poor score is to pay down your credit card debt. Many credit scoring models heavily consider the amount of debt you have in relation to your credit limit. If you can pay down debt, it looks good for your credit situation.
Being added as an authorized user and getting a secured credit card can also help in situations where you are trying to reestablish your credit. If you can’t qualify for an unsecured card because of your poor credit history, use a secured credit card to begin illustrating your ability to manage your credit better.
Finally, it’s important to make sure that you change your financial habits. Consider the behaviors that led to your poor credit situation and make adjustments. Whether or not you think it’s fair, many financial services providers use your credit history and score as proof of your ability to handle your finances. “Unless you make good financial choices and avoid your past mistakes,” says Rampton, “you’ll just end up back where you started.”