Your credit score is so important. It can mean the difference between getting a mortgage, a credit card, a car or store card – and not getting one. Needless to say, these things are life changing and if we can manage our money correctly, we can have all of these things and still have disposable income.
Thing is, the credit world is so confusing. Often, it can be difficult to know what helps your credit score and what harms it.
So, we’ve given you a handy guide below to help you out in your pursuit.
Here’s how to build a high credit score.
First Credit Card
When you set off into the independent financial world, the chances are you’ve never had a line of credit before. With no credit history, many lenders will refuse an application of credit as you are considered a risk. This is because there are no clear indicators or evidence of credit management.
Having said that, there are lenders that are willing to give people that chance by offering a credit builder credit card. This is for people who have never had credit and it works by offering the person a very low credit limit, usually of around $250. If you can manage this limit correctly, stick to a smart credit utilization (more on that later) and pay off in full every month – you will soon find your credit limit increased by the lender.
The larger your credit limit, your score will begin to increase – if it is still managed correctly. This is because potential lenders are indicated that you have a large credit limit and still continue to manage this responsibly. Therefore, you are not a risk to future lines of credit.
Paying Off In Full (Credit Card Monthly)
Most credit cards and especially your first credit card, will have an interest rate. Your first credit card will likely have a higher interest rate. The only time you will pay interest on credit is if you have not paid the balance in full by the statement due date. You will pay interest on the full balance otherwise, even if you only owe $1. So, it’s a good idea to pay off anything you owe monthly. It shows stability and responsibility which is a good indicator to lenders and increases your credit score.
Handy Tip: Use your credit card for things like gas only and remain with a very low balance by the end of the month – pay this off in full. By the end of the year, your credit score will skyrocket (assuming there are no other credit problems).
Credit utilization is very important. It refers to the amount of credit you’re spending compared with your credit limit and the amount of money you’re paying back.
Experts debate what the correct credit utilization rate (CUR) is. Generally speaking, 30% or lower will lead to a good credit score, whereas 10% will result in an excellent credit score. Remember our handy tip? This is where you can exploit it.
Pay Your Bills On Time!
Missed payments will result in black marks on your credit score which takes a while to get rid of. These are horrible to have as lenders will assume you’re not to be trusted when it comes to paying back what you owe on time. It’s a wise idea to set up regular monthly payment agreements with any creditor and anyone else you owe.
Be Credit Savvy
It’s all well and good saying be wise with a small amount of credit, but what happens if you need to make a large purchase that you can’t afford to pay off by the end of the month?
Compare credit card deals and look for the credit card that will suit your needs. If you’re looking to make a big purchase and pay it off over a number of months or years, you’ll want to look for a purchase card. These are normally on offer at 0% interest for a long time (typically 24-36 months). If you can pay off the balance before the end date, you will not pay interest on what you’ve borrowed – but beware that longer than that and the interest rate might skyrocket.
If your credit score is rising, you’ll be eligible for more and more credit cards on offer. Always look for the best deals. If you’ve noticed a credit card offering a lower interest rate or rewards, it might be wise for you to balance transfer (credit refinancing) to that card. It’s worth checking if they charge a transfer fee though, which is often around 3%.
In an ideal credit scenario, your balance will be low and you will balance transfer over to a high limit card at 0% interest with a $0 transfer fee. Try and find something similar to this.
Don’t Be Tempted
When you’re given such large sums of credit, it can be tempting to go on spending sprees and get what you’ve always wanted. But doing so will spiral you into huge debts, a low credit score and likely legal action. You’ll also find it nearly impossible to get a mortgage and sometimes struggle to get work, depending on the employer.
Needless to say, you have to remain credit smart and responsible. Credit scores are all about management and responsibility – if you can prove these, then you’re golden.