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Your credit score can determine what you can buy, what type of car you drive, your insurance rate and even where you can live and work. Therefore, it is important to build and maintain the best credit history possible. Having poor credit, little or no established credit or unresolved disputes with creditors can affect your purchasing power and your ability to get a loan or mortgage.
Many people fall into personal debt at some point in their lives. And while some bad credit situations are unavoidable, there are ways to keep your credit spotless from the start.
Your credit score should be rated an "A" if you have five or six solid pieces of seasoned credit (i.e., auto loan, mortgage, credit card, etc.) that are at least two years old and indicate no late payments. Many underwriters understand that your credit can't always be perfect; therefore they can usually excuse a few minor mistakes. These may include up to two credit card payments that were 30 days late, or one installment payment (auto or personal loan payment) that was 30 days late. However, no payments of any kind should be more than 60 days late, and no mortgage or rent payments should be late at all. There should also be no outstanding debts resulting in judgments or liens.
See What Lenders Look
For to learn how your lender may evaluate your credit history.
Building good credit isn't that difficult, especially if you know what you're getting into from the start. In fact, it takes only a few simple steps and some smart financial decisions to make sure your credit remains in solid standing. Read our good credit tips below.
Checking & Savings Accounts
Try to open both accounts, even if your balances are low. Lenders will look for a financial history and having both of these accounts will improve your credit score rating. Naturally, the more you have in savings and investments, the better your chances are for a loan or mortgage approval, but keep in mind that it's okay to start small to build your good credit history.
Stable Address
Keeping the same address for two or more years will help show lenders that
you have stability in your life. This makes you reliable and less of a
credit risk, increasing your chances of getting a better loan. College
students, due to their frequently changing addresses, are given a little
more latitude.
Income
When evaluating your credit, lenders carefully weigh how much you earn and how long you have been with your present employer against how much you owe (your debt to income ratio). If your debt to income ratio is too high, it may negatively affect your loan application. However, if you have proven that you can make your monthly payments on time, lenders will usually be more accommodating to your financial requests.
Credit References
If you have open accounts (i.e., credit cards, student loans, mortgage
or rent), it's vital that you make your payments on time, preferably in
full each month.
Credit Cards
Be aware of the risks involved when you use credit cards. Don't accumulate too many credit cards — start small. Begin with a retail card and pay off the balance in full each month. As you begin to demonstrate your financial responsibility, apply for a major brand name credit card or a secured card.
Secured Cards
If you are just starting out, or trying to rebuild your good credit rating, you may want to consider applying for a secured card. Some banks will ask you to deposit an amount (usually between $100 to $1,000) to use as your credit limit. The bank will then issue you a credit card. The deposit assures them you will honor your credit debt. If you don't, the bank will most likely confiscate your deposit. Be sure to ask about rates and potential application and processing fees, and if such fees will be refunded if your application is denied.
Low-Rate Credit Cards
Virtually everyone needs at least one credit card these days, and the best kind to get is a low-interest/no or low annual fee rate credit card. If you have more than one card, it may be a good idea to transfer your balances onto the one with the lowest rate. You'll have fewer bills to pay each month, and you can take advantage of the lower rate. But using one card can get risky because the rate may rise unexpectedly. Often you'll start with a low introductory rate, but after six months the rate will increase to the average credit card rate, which is significantly higher. Pay attention to your monthly statements and if the rate increases too much, shop around for a better deal. If you have been making your payments on time, you should qualify for a lower rate.
If you do choose to transfer your balances to one card, be aware that
the amount you transfer may be charged interest at the low rate, but any
new debts you charge may be financed at the standard credit card rate.
Check with your bank first and also ask how long the low rate will last.
Remember that some credit card companies will impose a monthly fee in
exchange for a low rate. However, if you are in good credit standing,
you may qualify for a low-rate card without having to pay the fee. Some credit card companies charge an annual fee, but have a zero interest rate. The catch? You must pay your balance in full each month.
Late Fees
Late fees are important to avoid and doing so is an excellent method of establishing good credit. Late fees are becoming more and more popular and can cause your effective interest rate to rise dramatically. Be sure to read the fine print and ask your card issuer questions.
Credit Limits
Don't let your credit limits get too high because a large line of available
credit means you are capable of spending a great deal. It may sound impressive
to have a high credit limit, but it can actually put you at risk. Even
if you have a stable credit history, lenders may fear you will overspend
and be incapable of handling your debt load.
To increase your credit reputation, consider closing unused accounts
and requesting that creditors lower your credit limit. Make certain your
credit report shows that you asked for these changes so other lenders
will know that you didn't have payment problems.
Credit Inquiries
An credit inquiry is generated when a creditor obtains your credit report (such as when you apply for a credit card). Inquiries typically remain on your credit report for two years. Therefore, by running unnecessary reports, you send out a signal that others are looking into your credit history. Try to avoid unnecessary credit checks. If a large number of inquiries occur in a short period of time, lenders may think that you either are overextending yourself by taking on more debt than you can actually pay back or are applying for more credit because of financial difficulty.
Judgments & Liens
If your property has a lien on it (which can legally be sold to another party) or if a collection agency has contacted you, it is likely you will be considered a high-risk borrower.
Keeping the above in mind will help you be able to build a good credit rating and provide you with a range of financial opportunities. But if you've found yourself with less-than-perfect credit,
see Cleaning Up Your
Bad Credit for tips on how to re-establish good credit.
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