Your Guide to Building Better Credit

Improving credit can be a bit complicated. If you do not have any credit history, you might not have experienced the difficulties of the loan process. Building a good credit rating is important because it directly affects your ability to borrow funds. Check your credit score now and if it is not where it should be, there are several things you can do to improve it.

The first step in building a good credit score starts with the awareness of the ins and outs of your credit rating. Being knowledgeable about your credit rating and the actions you make to increase it will aid you in unlocking the full power of your credit potential and help you achieve your goals in life.

Get Credit to Begin Improving Creditbuild credit

Achieving a good credit score means you have proven that you can manage your finances responsibly and have paid on time. To be able to build a credit score, you must get credit first. Receiving credit for the first time can be difficult because banks and credit card companies will check your credit history when processing an application. You can try applying for a secured credit card.

A secured credit card is a kind of credit card that requires you to make a secured deposit against a given limit on the credit before it can be approved. The deposit will be held as collateral for the amount you will use on the credit card. It will be refunded when you close your account or it is promoted to an unsecured account. Credit card companies usually approve applications for a secured credit card because the deposit will waive the risk.

Get a Partner for Loans or Credit Cards

A partner or “cosigner” who already has a good credit rating can apply with you to increase your chances of getting approved for a loan or a credit card. Cosigners will be joint liability for that account. This means that if you make a late payment, it will have a direct effect on the co-signer’s credit score too. It is recommended to use cosigned accounts to setup your first account. After building your own credit score, you will not need to depend on someone else’s credit power anymore.

Start with Only One Credit Card

A lot of first time credit card holders apply for multiple credit cards within their first years of using credit. Do not make the mistake of opening multiple credit cards too soon. This is bad for you because the more credit cards you use, the more difficult it is to pay your debts.  Applying for multiple credit cards in just a short period of time will result in numerous inquiries on your credit history. These inquiries will have a negative effect on your credit score. It is recommended to first learn how to manage one credit card before you avail of additional credit card.

Optimize Credit Utilization Ratio

You must try to achieve a credit utilization ratio of below 35%. If you have exceeded beyond that ideal limit, here are some tips to lower it:

  • Exceed the minimum monthly payment to decrease credit card balances. 
  • Leave your credit cards open after they have been paid to lessen the overall balance but remember to maintain the total limit. Always remember that most credit cards have an annual fee and this fee should be your deciding factor if you should still continue your account or close it. 
  • Ask to increase your credit limit on one of your cards but not all of them. You must also resist the temptation to spend more money. Remember that the increase in credit limit will require a hard inquiry which means it can temporarily decrease your credit score a little. 
  • Refinance your high interest-rate cards using a personal loan with lower rates and with better terms. Combining several credit card debts into a low-interest loan will lessen the interest you have. This means you can pay your balances much easier and faster. As an added bonus, credit cards that are kept open after transferring a balance to a personal loan will lower your credit utilization ratio.

Fix Common Mistakes that Affect Credit Scores

Here are some common financial mistakes people make, and what to do with them to improve credit scores:

  • Tax Liens – if you have been unable to pay your taxes, the government will put a lien on your property which will reflect on your credit report. See to it that you can pay your debt balances immediately because the unpaid liens will be on your credit report indefinitely, and the paid liens stay for seven years based from the payment date. If you have paid all your tax dues, ask for a withdrawal which will remove the lien notices from your credit report. Tax liens have severe effects on credit reports but not all liens will show up on it. 
  • Bankruptcy – Trying to recover from a bankruptcy is difficult because this will stain your record for a long time which will make it even harder to get credit. You can try obtaining a secured card so that you can immediately start reconstructing your credit report. Remember to pick a secured card that has a feature that reports your payment activities to the major credit bureaus because not all credit card companies report activities. 
  • Repossession and Foreclosure – Both of these will be on your credit reports for up to seven years. Try and focus on increasing positive activities on your credit report such as making payments on time and decreasing your balances to boost credit scores.

Having a solid credit rating will certainly help you reach those goals you set for yourself, including getting that low rate loan to buy your brand-new dream car or your first house. So regularly do a checkup on your credit rating and credit report so that you will be in control of your finances and achieve the full potential of your credit.