Whether you’re just starting out, or you had a troubled financial past, you may now be challenged with building a good credit profile. While you may know what not to do, taking a more proactive stance on building credit is just as important. These tips can help you build a good credit score without forcing you to take on debt that you really don’t need.
Get a Secured Credit Card
A secured credit card provides a safe way for you to build your credit by linking the card to a checking account in your name. Your credit limit will be based on the amount you maintain in the checking account. For instance, if you keep a balance of $200 in the checking account, your credit card may have a credit limit for that same amount. This helps you build credit without the possibility of falling into a cycle of growing debt.
Get Credit for Paying Your Rent
Typically, financial advisors or debt experts such as Truman Advisors recommend buying a home over renting, simply because you don’t benefit from paying rent. While that is true, there are a few new apps on the market that are starting to change that. Traditionally, paying rent was akin to tossing your money into a black hole. You aren’t earning equity, and you aren’t helping your credit score. Rental Kharma and RentTrack are just a couple of the apps changing that by ensuring your on-time rent payments are calculated as a part of your credit score. This can be enough to build up your score and make it easier to get the home loan you want.
Be Cautious About Borrowing
Before you apply for a personal loan, take the time to examine your budget. You should create a new budget that will include the installment payments that you’ll have to make on the loan. If it looks like you’ll have problems making your payments on time, it may be best to look for another alternative. Even one late payment can result on negative hits on your credit report, which will bring your credit score down. You may be better off looking for an alternative source of income, rather than risking the possibility of sabotaging your credit.
Use Credit Cards Wisely
It’s common for people to use credit cards to buy big ticket items, but this is actually an unwise way to use your credit cards. Instead, you should only use your cards for small purchases which you can pay off within the same billing cycle. This can help you avoid the interest charges that make credit card debt so difficult to clear up. Once you begin drawing out those debts, your minimum monthly payments will be primarily comprised of interest, and you’ll find it next to impossible to pay off that debt.
Pay Your Bills on Time
While this may seem simple and insignificant, how good you are at paying off your debts will affect your credit score. As Truman Advisors and other financial experts warn, late and missed payments can negatively affect your credit rating. On the other hand, keeping up with your bills and taking steps to ensure each bill is paid on time will help you build a stronger credit profile. Think of your credit history as your financial reputation. It shows potential lenders how trustworthy you are in terms of repaying your debts.
Don’t Max Out Your Credit Cards
Another way that lenders look at credit is by analyzing your credit to debt ratio. This means comparing your total available credit against how much debt you have amassed. For instance, suppose you have three cards with a credit limit of $1,000 on each card, but you have only used a total of $700 of that credit. This is an example of a good credit to debt ratio. On the other hand, if you have charged up to $2,500 on your cards, this indicates that you manage your finances poorly, and you’re less likely to be approved for a loan with reasonable terms.
Hold onto the Same Cards
While it may be tempting to ditch your current card in order to get a good deal on a new card, just closing an account can harm your credit score. Maintaining a credit card account for a longer period of time can help show that you’re financially responsible, which will reflect well to lenders. On the other hand, a history of trading one card for another just to get that introductory offer will suggest that you’re a more whimsical consumer. This can leave lenders, and others who may review your credit report, to feel that you pose a greater risk.
Following these suggestions can help you build up your credit. A good score can help you function in society in more ways than you may realize. We need to rely on our credit scores for everything from renting an apartment to running a business. Taking the time to build a strong score by employing these suggestions will help you live an easier life well into the future.