Ben Todd | Jun 2, 2017 | 0
How To Build Your Credit
Your credit rating, your credit score, your FICO score, is part of what lenders use to figure out if you are a credible customer. All three terms mean the same thing. Lenders use your credit score, your credit history, and your current circumstances to figure out if you should have credit, if you should get that loan, if you should be allowed to rent, and so forth. You can live quite happily without ever worrying about your credit rating because you only really experience problems if you have a bad credit rating through mismanaging your finances. Yet, having a good credit rating has its advantages. In this article, we explain how to build your credit and explain why it may be a good idea.
What Is A Credit Score, Credit Rating And FICO Score?
You may hear these terms thrown around by lenders and such, and the fact is that they all mean the same thing. When people talk about your credit score, your credit rating or your FICO score, they are talking about your credit ranking as per three main credit-scoring companies.
In the US, there are three main credit scoring/ credit referencing companies. They are called TransUnion (Callcredit), Equifax and Experian. If you pay your bills on time and you manage your bank accounts well, then companies and banks will report this activity to these credit reference agencies and these reference agencies will increase your credit score.
If you mismanage your accounts, if you fail to pay your bills, or if you plunge too far into debt, then these three credit reference agencies will lower your credit rating. In the event that your credit rating goes too low, then some merchants will be unwilling to do business with you, some estate agents will not rent to you, and your lending options will be severely restricted and unfairly expensive.
You are able to get a credit report from the three credit reference companies. You may be able to get free credit reports from other companies too. A credit report shows your credit rating as a score, and it shows your credit history. It also shows a bunch of other things that lenders find interesting. These days, you can get free credit ratings, so don’t waste your money by paying for them.
While reading this article, remember that the terms “Credit Rating,” “Credit Score,” And “FICO Score” are interchangeable because they all mean the same thing. They all refer to the scores you are given by three of America’s most popular credit referencing agencies.
Does ChexSystems Keep Track Of Your Credit Score Too?
There is also a company called ChexSystems. They keep track of things such as your checking and savings accounts, but they have no affect on your credit score. However, you may be denied a new bank account if ChexSystems holds a negative record in your name. ChexSystem only keeps bad records for things such as going overdrawn on your account. You don’t have to worry too much about ChexSystems when you are building your credit, but you do have to worry about them a little if you are building your credit in order to open a new bank account. Especially if you are improving your credit rating to gain access to prestige accounts that you have not been able to sign up for in the past. Just so that you know, here are the things that ChexSystem records. Again, your records with ChexSystem will not affect your credit rating, but it is still a good idea to keep yourself off their reports.
Is This The Same As Your Credit History Or Banking History?
These days, many people talk about credit history and banking history when they actually mean credit rating (the thing we covered earlier). Technically, your credit history and banking history is not the same as your credit rating. If somebody is talking about your credit history or banking history, there is a good chance they mean your current credit rating.
Your credit history or banking history is exactly what it sounds like it is. It is a record of what you have done with your credit and bank in the past. For example, if you apply for a loan, the application may not have any effect on your credit rating, so your score stays the same. However, the loan application will appear on your credit history/banking history.
The terms banking history and credit history mean the same thing. They are a record of your activity from the recent past (the last 6-10 years in most cases).
If you were to apply for a loan, then it is noted on your credit history even if it doesn’t affect your credit rating. That is the correct use of the term “Credit History” or “Banking History.”
Another correct use of the term is when somebody says they have very little banking or credit history. A teen who is fresh from college may have very little credit history, which may make getting loans and new bank accounts a little tricky.
A Quick Lesson On How To Build Your Credit
You may build your credit by correctly managing your finances. There are four key components to building your credit. They include correctly managing your money, paying your bills and loans on time, staying within your credit limits, and borrowing only the amounts that you are able to pay back. You risk damaging your credit rating if you do any of the following:
- Declare bankruptcy
- Make late payments
- Borrow more money than you can afford to pay back
- Have too many lines of credit that have large balances
- Pay less money than the minimum amount on a credit card bill
- Have too much available credit with too many different lenders
- Letting your overdue accounts be given on to a collection agency
What Are The Advantages Of Having A Good Credit Rating?
There are quite a few advantages to having good credit. The only problem is that many of the advantages have more to do with getting into debt than anything else. Most people build their credit so that they are able to get into debt, and getting into debt is not always a smart idea. After all, if you are trying to build wealth, then it may not be smart getting into debt and paying interest on money you have spent. It is far better having interest paid to you for money you haven’t spent. Here are a few advantages to having a good credit rating, which may serve as incentives to build your credit.
Rent A Place To Live
Despite the fact that you are not borrowing from a landlord, they often run credit checks. Either your future landlord or the estate agency will run a credit check to see how good you are with your money. If you have a very poor credit rating, then the estate agency may refuse your application to rent a place to live. They may assume that your poor credit rating is due to a serious money-management problem, which makes them suspect that you may not pay the rent on time.
Buy Your Own Home
When you apply for your mortgage or your home loan, your bank is going to look at your credit rating and your credit history. If your credit rating is okay, then they may consider giving you a mortgage and/or home loan, but the interest rate they charge will probably be pretty nasty. If you have a good credit rating, they will be more inclined to offer a better interest rate, which is going to save you thousands of dollars in the long run.
Credit Cards And Interest Rates
There are parasitic companies out there that will offer credit cards to just about anybody because they want to drain people for every cent they can. If you have a good credit rating, you may choose between the very best credit card issuers. If you have a bad credit rating, you are left with poor quality companies, with parasitic companies, and with unreasonably high interest rates.
Some Employers Will Run A Credit Check
There are quite a few jobs where a clean or healthy credit rating is a key component of your application. Many jobs in the financial sector will demand a credit check prior to hiring you because they are not willing to put people in a position of trust if said people are in debt. It is not just the financial sector where this is true. For example, in the United Kingdom, it is government policy to exclude applicants who are in debt for jobs such as prison guards and prisoner escorts.
Home Utility And Phone Accounts
Many home utility companies and phone companies are going to run a credit check on you prior to accepting you as a customer. They want to know if you are going to pay your bills on time. If you have a good credit rating, then the home utility and phone companies have no reason to turn you down, so you may have your pick of the best. There are utility companies and phone companies that will take you on if you have a poor credit rating, but they will often offer you the worst rates and prices.
Credit On Bigger Purchases
Some merchants will allow you to buy bigger items such as washers and freezers and then pay for them monthly instead of paying for them all in one go. In many cases, these types of deals are a rip off, but there are occasions where you get interest-free credit for a number of months, and if you pay it off before the interest-free period, then you may have a good deal. However, you will not be offered promotions or credit if your credit rating is bad.
Borrowing Money Is Easier With A Good Credit Rating
When you think of building your credit, you probably think about borrowing. If you have a good credit rating, then far more lenders will be willing to give you credit. If you have a good credit rating, then it is not a guarantee that you will be accepted, but lenders are more likely to accept your application than if you have a poor credit rating. Lenders also try to entice people who have a good credit rating by offering them a lower interest rate.
Finance Or Lease A Car
If you want a car loan or if you want to lease a car, then the dealer is going to run a credit check on you. If your credit rating sucks, then the dealer will either turn you down, or the dealer will give you a terrible deal with an atrocious interest rate. Build up a good credit rating, and you may be able to negotiate when it comes to the interest rate, but the same is not true if you have a poor credit rating.
How To Build Your Credit By Understanding The Credit Game
Let’s dive right in and start considering which factors help raise your credit rating and why. If you understand what is affecting your credit rating, then you should be able to alter your actions and your money-management techniques to your advantage.
Consider Your Debt-To-Income Ratio
If you are looking to pay down your debt in order to build your credit, then try to plan around your debt-to-income ratio. When you apply for credit, they often ask you how much you earn. The lender then looks at your credit rating and your credit history to see how much debt you are already in. If you have a high income and a low amount of debt, then you stand more chance of getting a loan.
Consider Your Credit-Debt Ratio
This is a thing called credit utilization, and many say that the optimum amount is 30% or lower. A simple example would be that if you have a credit card with a limit of $1000, then spending $300 or less would help keep your credit rating healthy. Your credit rating will go down if you are in too much debt and if your credit utilization is very high.
Think About How Many Lines Of Credit You Have Available
Some people think that they can trick the credit reference companies. They run out, get several different credit cards, and keep them without spending on them. They do this so that their credit utilization goes down, but credit reference companies are wise to this trick and will adjust your credit rating downwards if they see that you have numerous lines of credit that you are not using.
Consolidate Your Maxed Out Credit Cards
If you have one or more credit cards and it/they is/are maxed out, then that is okay so long as you start paying off your debt. However, if your cards are maxed and they continue to remain maxed out for a long time, then this doesn’t do your credit rating any good at all. It may be better to get a consolidation loan to pay off your credit card debt.
Small Credit Card Balances On Numerous Cards Is Bad
For some reason, if you have three or more credit cards, and if you have a balance (debt) on each of them, then it will negatively affect your credit rating. Even if the balances are small, such as a few dollars, it will still affect your credit rating and make it more difficult for you to build your credit. For some reason, if you have multiple balances on multiple cards, it shows that you are not very good at managing your money. If you had $10 on one card, $15 on another, and $20 on another, then your credit rating will go up if you clear the balance on two cards and put the entire $45 worth of debt on one card.
Old Debt And New Debt
For some reason, and I have no idea why, newer debt affects your credit rating more than older debt. For example, if you have had a loan for over two years and you are slowing paying it off, and then you get another loan more recently, it is actually better for your credit rating if you pay off your new loan first. I am not sure why this is; we keep seeing evidence for it again and again when we test and review lending companies.
Don’t Argue Too Much With The Credit Reference Companies
It may be better to leave small and silly mistakes on your credit report because starting a dispute will negatively affect your credit rating. It may not seem like it at first, but your credit rating will not rise quickly if you have a dispute still open. Only contest and dispute the seriously wrong stuff. If it is something small, such as your last loan was $3000 and not the $3550 that it says on your credit report, then leave it and forget about it.
Stop Trying To Have Old Debt Cleared From Your Credit Report
There are some people who monitor their credit ratings and their credit reports a little too closely. They do things such as pay off their loans and then jump straight onto the Internet to tell the credit reference companies to remove the old debt from their credit report. Eventually, your repaid loans and repaid debt will be cleared from your credit report, so don’t worry about it because stirring up trouble is not worth it.
Don’t Try To Remove Your Repaid Debts From Your Credit History
For some reason, there are people out there who pay off their debts and then open disputes to try and have all records of the debt removed. It is understandable if you missed a bunch of payments, but it is not so terrible because all evidence of the bad debt will be gone in seven years (unless you went bankrupt or insolvent). It is not so understandable if you have paid off your debt and all was fine. The fact you had debt in the past is not a bad thing, and the fact you paid it off is a good thing. It is not the sort of thing you should be trying to expunge from your credit report.
Too Many Hard Credit Searches Is A Bad Thing
If a company runs a hard credit search on you, then it is okay. If it happens more than twice within a six-month period, then your credit rating may go down. Too many hard (recorded) searches on your credit report may indicate that you are actively seeking debt and are not getting results. It suggests that creditors are turning you down if you are receiving numerous hard credit searches. If you are turned down twice, then wait at least six months before you apply for credit again. Have companies run a soft search on you because they will not be recorded on your credit report and so will not affect your credit rating.
Pay Your Bills On Time
When you miss your bill payments, they are often recorded on your credit report (which shows your credit history and your credit rating). Do it too often and your credit rating will suffer. Some companies are keener when it comes to reporting. For example, miss a credit card payment or pay less than the minimum payment, and it will have a very quick effect on your credit rating. However, if you are late on your rent, your landlord may not report it to any of the credit referencing agencies.
How Much Money You Have May Not Matter
You may wonder why your credit rating is so poor when you have thousands in your savings account and you have not overdrawn your checking account in the last ten years. The reason is that your credit rating has little to do with how much money you have, it is all about how you handle credit. That is why people who have never had credit cards or loans are the ones that find it hard to raise their credit rating; it is because they have had very little experience with “credit,” so their credit score and credit history shows that they have had very little experience dealing with credit and debt.
Conclusion – Put Yourself In The Credit Referencing Companies’ Shoes
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They are going to read motivations into your actions, which is why some behaviors are more risky than others. For example, if you have more than two hard credit searches in the space of six months, then the credit scorers assume you are looking for money and you are being turned down by lenders. For example, if you start taking cash advances from your credit card when you have not taken them before, then the credit scorers may assume you are in financial trouble, which is especially true if they see a flurry of cash advances from your credit card after years of having no cash advances. Even things such as the sudden use of gambling websites may affect your credit rating because the credit scorers are reading motivations into your actions and they must figure that people who gamble are likely to start missing their bill payments any time soon.