There are many reasons why anyone would need a loan or a credit card, but getting a loan is difficult. Apart from the difficulty with getting loans, there is also the problem of high-interest rates on loans.
Banks find it difficult to say if someone is trustworthy enough to borrow money without looking at their credit history. Having a good credit history gives the bank a foundation to trust you and significantly affects subsequent deals.
From insurance to a lot of things in life, I often find myself in situations that my credit history affects. I will share tips on building credit in this article so that you can also have easy access to financial aid when you need it.
Before we start, take a few seconds to watch this video:
Your Credit Score
Your credit score is a great determiner in your financial identity; it directly affects how much loan you can get and your interest rate. A credit score or a fico score is a figure between 300 and 850, showing how creditworthy a consumer is.
Having a higher credit score makes you more attractive to a loaner. A good credit score gets you lower rates for both short term emergencies and long term needs.
How Does Your Credit Score Affect you?
Falling behind on your credits may not affect your mortgage or car loan, but it could cost you eventually because it will result in them charging you higher rates.
Landlords and employers sometimes look at your credit score to gauge your credibility as a tenant or employee. Some insurance companies may also link your credit score to your responsibility as a driver.
How is Your Credit Score calculated?
I have made a list of the five major things that affect your credit score based on a credit report. A credit score is calculated based on the following items:
- Your credit history and how responsible you have been with managing debt accounts for 15%.
- Total debt owed is calculated by credit utilization and accounts for 30% of your credit score. It shows your debt to credit ratio.
- Your Payment History indicates how early and consistently you pay your credits, and it accounts for about 35% of your credit score.
- Recently opened accounts affect 10% of your credit score. Too many credit accounts can make you look desperate.
- The different types of credits make makeup 10% of your credit score. A good mix will have a mortgage, car payments, or installment loans and credit cars.
How to check your credit report
There are three national credit reporting bureaus (Experian, Transunion, and Equifax) that report, store, and update your credit history. They use different methods to calculate credit scores and can give you a free credit report annually, but they charge a fee for giving your actual credit score.
Why do you Need to Build credit?
I have come to observe that many parts of our daily lives revolve around good credit history. Sometimes you feel you will never need a good credit history because you are financially secure, but without a well-built credit, you will have a hard time getting trust for a lot of things.
Most banks, loaners, insurance companies, landlords, employers, cell phone companies, and a long list of people that offer monetary services don’t trust you. However, when they decide to take the risk of trust, they often add interest to whatever you pay because of the risk that comes with lending.
Other companies that cannot put an interest rate on the risk of trust may ask you to make large collateral deposits. Some employers may not hire you if you have no credit history or bad credit history because they fear you may be a liability.
Because of these factors, you should learn and apply how to build credit and have a good credit history to avoid a life of unnecessary limitations.
How to Build Credit
Building credit is harder than it seems because you need to have a credit history or a good credit score. If you can’t get loans or credit cards, how can you make a good credit history?
Starting with having a bank account is good because it can help you get loans and a credit card from the same bank. But I would discuss other credit-building tools in this part of the article.
5 Ways to Build Credit From Scratch
To build credit from scratch, you will find the following tips helpful.
1. Get a Secured Credit Card
A secured credit card has a security deposit that serves as untouchable collateral. You do not get to use the security deposit, but it would be equal to your credit limit.
Some banks have it for people that want to establish or rebuild their credit. You would get your deposit back on closing the account.
A secured card helps to build your credit so that you can qualify for an unsecured card with better benefits and no deposits. When getting a secured card, look for one with a low annual fee.
Also, ensure you pay on time and that your early payments reported to the bureaus of credit reporting by your lender otherwise find a new card issuer. Because not reporting your credit payment does not build your credit score.
Take note that a prepaid card does not establish a credit history.
2. Get a Secured Loan or a Credit-Builder Loan
As its name implies, a secured loan helps you to build credit. How it works is, you borrow money, and your lender holds onto it until you pay for the loan before the loan is released.
It is sort of a forced savings account with a loaner who reports your payments to the credit bureaus. Usually, community banks, credit unions, and a few online lenders offer this type of loan.
A second option would be using your credit union or bank account balance as a certificate of deposit or collateral. These interest rates are higher than the account’s regular interest rate, but it may be your cheapest option.
3. For the Bills You Already Pay, Get credits
You can build your credit history with rent reporting services who can take the bills you already pay and put it on your credit report. Some credit scores do not consider these bills, but it can help you get a loan or a credit card that then gives you a good credit history.
Experian gives an option for your utility bills to reflect your credit report. However, this is only limited to Experian.
4. Being an Authorized User
If you have a family member with a good credit card history, they can add you as an authorized user. Being an authorized user adds the person’s card payment history to your credit history.
Additionally, being an authorized user reduces the time it takes to get a credit score. The best part is you don’t need to have or use the credit card to get its benefits!
Before being an authorized user, make agreements on if and how you will use the card. Also, confirm if being an authorized user is reported to the credit bureaus, so you don’t waste your time trying and failing to build credit.
Note that some credit card companies require a fee for having an authorized user on your card. So, be prepared to pay if you get authorized.
Authorized users are most often teenagers that their parents authorize to teach them how to manage credit.
5. Have a Cosigner
A cosigner is a guarantor that is willing to pay for you’re the full amount you owe if you don’t pay. You can get a loan or unsecured credit card with a cosigner, but you must both understand the risks.
Usually, co-signing is done by parents for their children. It would be difficult to get a cosigner as an adult.
How to Build a Good Credit Score
Having a good credit habit will help you maintain the credits when you have successfully built credit from scratch. A good score can also reduce the interest rates on your credit accounts.
To have a credit score, you need to have at least an account that has been open for six months and at least one creditor that reports your activities in the same six months. I have made a list of healthy habits that will build your credit score.
- The first rule is to make all payments on time, both credit payments and utility payments, to avoid skeletons in your credit closet.
- Except you have a compelling reason, don’t close your credit accounts, it hurts your credit score. You can stop using it instead of closing it entirely.
- Keep credit utilization minimal so that you do not look like you are consolidating your income with credit.
- Avoid applying for multiple credits close to each other, and it gives off desperate vibes.
How Your Credit Score Affects your Mortgage
When you get a mortgage, your credit score reduces because a mortgage increases total debt and increases the credit utilization ratio. Opening a new account also reduces your credit score by increasing your amount of new accounts.
However, making on-time payments that will be reported increases your credit score. Also, having a mortgage gives a better credit mix and improves the credit score.
The major effect your credit score will have on your mortgage is on the additional mortgage rates. If you have built a good score, your interest rates and taxes will be less, and the opposite happens with a bad score.
Having a bad credit score means you have not built credit well, so the mortgage loaners will be taking a big risk with you and will compensate themselves by charging you higher interest rates.
Click here for more on mortgage and credit score.
How Your Credit Score Affects your Insurance
When you get insurance, you must pay a premium to the insurer either annually or biannually. Insurers gauge how much of a risk you are with your driving history, business history, and other factors depending on the type of insurance.
They also check your credit score to note your payment history (if you have late or delinquent payments), the other types of insurance, and the length of your credit history. After checking these factors, they determine how much of a risk you are like a mortgage loaner and calculate your premium to compensate for possible dangers.
How Your Credit Score Affects your Students’ Loans
Credit scores affect the ease of getting student loans. Apart from this, paying off your student’s loan will drop your credit score at first because it means you are closing a credit account.
It is essential to know that having student loans and paying on time will improve your credit score, but it will lead to hidden charges if you are unable to pay up. Here is an article that discusses hidden charges.
Your name always precedes you, and in business, your reputation is often your credit history. I cannot downplay or overplay the importance of good credit history because good credit saves you many extra costs in the long run.
Building credit cannot happen in a day, and I have shared some of the best ways to build credit and monitor it in this article. Hopefully, these tips will help you in the long run.
If you found this article helpful or have any follow-up questions, don’t forget to tell me in the comments below. You can also leave comments on the other business tips you want me to feature in my blog.
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