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You’re never too young or too old to build good credit.
If you’re in college and have student loans, you’ve already taken a first step to building credit. If you’re a recent graduate and you’re making payments, you’re already taking steps to build your credit score.
But how does it all work? Credit and credit scoring is shrouded in mystery for some. We’ve developed this guide to help you understand credit and build the credit you need to achieve your dreams like buying a car and owning a home.
What You Need to Know About Credit Reports and Credit Scores
Your first and most important task is to understand your credit report. If you’ve never seen a credit report, start by downloading a free copy of your report at annualcreditreport.com. You’ll see the information on any loans and credit cards you have or have in the past. You’ll see payment history, balances, as well as debt collection agency information if you’ve had to deal with delinquent debts.
Second, you’ll want to learn about credit scores. Perhaps you’ve heard of the FICO Score. It’s a scoring model that lets lenders determine the risk of lending you money. FICO and other credit scores take into account how much existing credit you have and whether or not you pay on time.
In order to build the best credit profile and achieve the maximum credit scores you can, you’ll need to have the right mix of credit. That means you’ll want to have the right combination of credit cards and loans. Here are some tips you can use to get started building your credit profile and increasing your credit score right now.
You’ll want to have a mix of retail store and major credit cards. Start by applying for a small specialty retail store card, then follow up with a major retailer. Next, you’ll need to apply for a Visa or MasterCard through your bank. If you can’t get a traditional credit card, consider a secured credit card. Your bank or other credit card company will extend credit secured by a savings account, and your credit limit is based on your deposit balance. This is by far the simplest way to qualify for a credit card. Online, you can find several credit card companies that specialize in offering secured Visa and MasterCard for people who need help establishing credit.
Authorized User Accounts
If your spouse or parents already have retail and major credit cards, ask them to add you as an authorized user to their account. In most cases, there is no credit application involved. There is much debate over how well authorized user accounts help build credit scores. But you will actually be added to the account with limited privileges. You’ll be able to use the card to make purchases, and all usage and payment activity will show up on your credit report. Since authorized users are not responsible for payments, most credit scoring models take that into account meaning that even a good payment history will have a lesser impact on your score since it’s clear that you’re not making the payments.
One of the easiest types of cosigner loans you can get is an auto loan. Since these loans are secured by the vehicle, getting a cosigner loan is highly likely if your cosigner has good credit. You’ll be able to qualify for lower rates and payments than you would if you use a high-credit-risk auto loan. You’ll most likely qualify for a later model vehicle. The benefit here is that, after establishing a good repayment pattern, you’ll be able to refinance your auto loan and further improve your credit standing.
Smart Ways to Manage Your Credit
Of course, you’ll need to make your payments on time but there’s more to credit-score building than payments alone.
First, watch your balance to available credit ratio, referred to as credit card utilization rate. Some experts say the magic number here is 30%. So if you have $1,000 in available credit, you’ll want to keep your current balance at or below $300.
Second, make sure to use your credit. Make your payments closer to your due date to ensure that balance activity gets reported to the credit reporting agencies. If you pay off your balance in full to eliminate the monthly payments, keep the credit card account open and use it regularly to make small purchases. Even if you pay the balance in full each month, making the payment at the right time in the billing cycle keeps a constant stream of good usage and payment patterns on your report.
Start Building Your Credit Today
Dedicate a portion of your income to credit building activities. Get a secured credit card and start using it to purchase groceries and household items or transportation and gasoline costs. Pay those balances in full every month, and you’ll be on the road to building great credit without busting your budget.
Author: Jeff Gitlen