Building your credit score is essential because, in life, you will need a loan to buy a car, start your own business, mortgage, pay for school, or whatever else life throws your way. There is no other way to prove that you are capable of paying your debt to companies that you owe money without a good credit score.
And, this is not the only reason you need a good credit score. For many people who cannot afford to buy a home, you will also need a credit score to rent. Your landlord needs an indicator of whether you can make your monthly payments on time.
A Good credit score might also be a requirement when applying for a job in the financial sector because your employer wants to know how good you are at managing your finances before giving you the responsibility to handle client’s accounts.
Here are a few practical ways to build your credit score without going more into more debt.
#1 Setting Financial Goals
Before you start the journey of building your credit score, you need to know your short and long term financial goals. Short term goals are those you can accomplish in a year, while long term goals take over a year. So the first question is, what are you trying to achieve? Can it be done in a year or five years from now? You need to answer these first and set realistic goals, which will give you a reason to start working on your credit. Your primary focus should be setting realistic goals that you can achieve; otherwise, you set yourself up for failure.
#2 Know your Credit Score
You then need to know what credit score you are striving for. According to Experian,” a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is excellent. However, the majority of the credit scores fall between 600 and 750. If your credit score ranges between 661- 780, have a better chance of getting approved for credit at competitive rates.
Why is this critical in decision making?
It is vital because if you are planning on buying a home, scores of 740 or higher qualify for conventional loans with a lower down payment requirements and interest rate. If you are thinking of opening your business, the minimum credit scores for Small Business loans are between 650 and 680 for considerable interest rates.
Everyone is eligible for a free annual credit report from the three national credit report agencies; Experian, Equifax, and TransUnion, by creating an account at annualcreditreport.com. Make sure you check out this website if you have not run your report yet.
What to look for on a Credit Report:
- Check if your personal information is up-to-date: Your Name, current address, and Social Security Number
- Verify if all your data is correct, including your credit accounts, credit limits on all your account cards, outstanding loans, and balances.
SO YES, knowing your credit score and what you are aiming at is crucial; however, checking your rating once a year will not cut the deal. It would be best if you were on top of it, at least checking once a month to accomplish your goals.
Fortunately, TransUnion has offered FREE WEEKLY CREDIT SCORE at Annualcreditreport.com until April of 2021 due to the COVID-19 Pandemic.
You can also start using some free online Apps like Credit Sesame that send monthly updates about changes to your credit and provide a $50,000 identity theft protection—allowing you to dispute any incorrect information that might affect your score.
#3 Become an Authorized User
A credit card with a low APR sounds like a good idea if you already built your credit, but what if this is your first card? In this case, build your credit score by becoming an authorized user.
According to this article from Experian, once you become an authorized user, that account will be added to your credit report. If the account holder is paying the card on time, and the balance kept minimal, your credit history will have a progressive outcome that will improve your credit score.
How do you become an authorized user?
To build your credit score, you need to be added to someone’s credit card and permitted to make purchases on that account. The owner of the account is responsible for paying that debt back to the issuer. In this case, you need to reach out to your parents, friends, or a partner who has a higher credit score and request them to add you as a user to one of their credit accounts. A credit card will be issued to you, but be responsible enough to know how beneficial this is to your score and the accounts’ owner.
The trick is finding someone on the same financial path as you because their activity on the account will also affect your credit report.
#4 Apply for a Credit Card but Know the Terms
Now that you have established your credit score from being an Authorized User, the next step is to apply for a credit card if you already didn’t have one. But before you do, it is crucial to know what you are getting yourself into to avoid the consequences that come with misusing the card.
What you need to know
The Annual Percentage Rate that your credit issuer is charging for borrowing the money. Your credit score report affects your APR. You are likely to get lower APR Rates if you have a good credit score because you are trusted to pay on time and not miss any payments. In contrast, a low credit score gets you high APR Rates.
Cash advance fee
A fee you charged for each cash transaction on your credit card applying mainly to ATM withdrawal and transfers.
Charged by the credit card issuer, if you are late on your payments, or you pay less than the required amount.
#5 Pay on time
Paying your credit card on time will not only build your credit score but also prevent your account from being sent to collections. It accounts for 35% of your credit score. Late payments lower your credit score, which is why you should make your payments with no default on other cards or loans in every billing cycle. The most efficient way is to schedule automatic payments and ensure that all your debts are all planned around the time you expect your income.
I recommend setting up automatic payments because you do not miss any due dates and will not pay late fees, but you can read more here for all the different options that you may find suitable to make payments on your card.
# 6 Build Sustainable Financial Habits
The final practical way to build your score is to improve your financial habits. You need to create a budget and know your expenses to avoid overspending on unnecessary items, which will increase your credit utilization and lower your score. This article explains Credit Utilization in detail and how it affects your credit score.
You will not build your score with poor spending habit. The simple RULE is if you cannot afford it with cash, DO NOT BUY IT ON CREDIT!! Avoid paying for vacations and luxury Purchases like with your credit card. Using more than 30% of your credit limit at a given time increases your credit utilization ratio, indicating you are a high-risk borrower. The more money you spend on your credit card, the higher the minimum payments, increasing the risk of late fees and lowering your credit score.
Find more tips here on how to keep your financial habits on track.
In summary, the five practical ways to build your credit score are:
- Setting Financial Goals
- Know your Credit Score
- Become An Authorized User
- Apply for a Credit Card But Know the Terms
- Pay on time
- Build Sustainable Financial Habits
I am not a financial advisor, so the tips shared above are only from my personal experience and informational purposes