In the world of personal finance, it’s common to hear the terms “credit score” and “credit history.” But why is everyone so preoccupied with building credit? And, most important, what helps build credit score?
Today, we’ll walk you through the best ways of how to build credit and why it’s essential.
Why is it important to build good credit?
Building credit is about reputation. There are many situations in life in which we need to sell ourselves. For example, when you’re interviewing for a job or meeting your future in-laws for the first time. When the other party doesn’t know much about you, you want to put your best foot forward so that they will trust you. The same happens when we take out a loan. A credit score works in the same way.
Maybe you want to buy a home and need a mortgage, or maybe you want a loan to start a business. Whatever the reason may be, the bank or investor will need to have some proof that they can rely on you to pay back the money they’re lending you. In other words, your credit score is like a financial CV.
Here are some instances in which having a good credit score comes in handy:
- Auto loans
- Business loans
- Payment flexibility for utility services
- Emergency credit
How to build good credit history from scratch
We get it. Having a good credit score is vital. But how is a credit score determined? And how do we go about getting one? As with everything in personal finance: it’s about starting small.
If you already have a bank account or debit card, you’re in a great position to begin your credit journey. All you need is to apply for a credit card or a small loan at your bank. However, before you do, be mindful that whatever you borrow has to be paid back.
It’s not about using credit to spend more money than you earn. It’s about using credit to prove you can deliver con your promise of paying back.
You can also build credit by paying bills. Here’s the step-by-step:
- Get a credit line or card from your bank
- Assign automatic payments like utility bills or insurance to your credit account
- Once you’ve been charged, pay off your credit card with the same money you’d use to pay for those bills
If you just opened a bank account or have had issues with credit or loans in the past, there are still many options available.
- Secured credit card: Banks want to have as many customers as possible, but they do need a guarantee that you’ll be a good one. A secured credit card allows you to build credit score while also protecting the bank. How? Through an upfront payment. In the same way property owners ask for a deposit for your rental in case you miss a payment or break something, the bank will ask for collateral.
- Store cards: Many retail stores will offer credit cards you can use to make purchases within their stores and help to build credit in the process. They usually come with perks like discounts or the ability to pay in installments. Just make sure they report your credit score (some might not).
- Co-signed loans: if you need both a small loan and to better your credit score, you can ask a parent or spouse to co-sign a loan. The only requirement is that your co-signer has a good credit score of their own, but keep in mind that they’ll be responsible for the loan. This kind of agreement shouldn’t be taken lightly, but it’s a good option for parents or spouses wanting to help their loved one.
How to build credit score and keep it in check
Getting started is important, but so is keeping up the good work. Once you get the hang of it, improving your credit score is easy. All you have to do is follow the golden rule: don’t borrow more than what you can afford.
This rule is essential when it comes to bigger commitments like a mortgage. Don’t forget to investigate how your credit score affects your mortgage rate – when buying a house, make sure your mortgage fees don’t go over your existing housing budget.
And what about a credit score for a car? If you’re planning to take out a car loan, calculate what percentage of your monthly income will be destined to paying it off. Don’t lose track of your budget just because it’s a smaller loan (that’s how life gets you!).
Finally, continue paying your recurring bills on time, whether they’re linked to your credit or your debit card.
By following these simple steps, you’ll be on your way to building a perfect credit history.