How To Establish Credit
Learn How To Establish Credit Your Way
Do you think you are paying too much in rent? Are your insurance premiums shocking? Are the interest rates you are paying on your credit cards in the double digits? You really need a new car, which would require getting an auto loan, however, is the interest rate on the loan outrageous? Feeling financially immobilized? Tired of that powerless feeling? Do you want to do something about that? You can. In 3 easy steps you can learn how to establish credit, good credit.
If you feel like your landlord, insurance company or credit card and loan company are crushing you on fees, charges and interest rates, take a step back. Don’t get upset with them, instead, look at your credit scores. Your credit scores may be the reason you are paying too much in rent, insurance and credit card or loan interest rates. In the process of establishing credit you are also establishing a credit score. If you want to lower your fees, charges and interest rates work on creating a credit score that these financial institutions find favorable. But let’s start with building credit and circle back to credit scores.
How To Build Credit
Step #1 – It Starts With A History
The number one question asked is how long does it take to establish credit? The quick answer is that it may not take a long time to establish credit. But the more extensive answer is that it can be tricky to accomplish. Your very first step towards establishing credit is to build a credit history and here’s where it gets tricky.
You need a credit card to establish credit but you cannot get a credit card without a credit history, that seems a bit contradictory doesn’t it? Take a deep breath…you may have a credit history and not even know it.
If you had a student loan (without a co-signer), pay monthly on a smartphone, iPhone or cellphone (billed in your name), pay rent (on a lease in your name), pay for utilities (billed in your name) or have been paying a monthly fee at your fitness center or gym (billed in your name), you have a credit history even though you do not have any credit cards. To check out your credit history order a free copy of your credit report from AnnualCreditReport.com. Don’t worry, the report is free once a year. You are allowed by federal law to obtain a free copy of your credit report once a year from each of the 3 major credit reporting agencies (Experian, Equifax and TransUnion). You will not get your credit score but you will get your credit report which is an accumulation of all of your credit and financial activity.
If your credit report does not show any activity, you need to create some in order to satisfy the financial institutions which determine how much you pay on credit card interest, loans and insurance premiums.
Step #2 – Build A History
Before any financial institution lends anyone money, they want a guarantee that they will get their money back. Without a track record creditors do not know you. How do they know if you can be trusted to repay any amounts you charge on a credit card or take out in an auto loan for example. They don’t, which is why you need to build a credit history.
Start with someone who you currently do business with. Try the bank where you have your checking account or a retail store that you shop at all the time. If you have a good track record with either of these financial institutions they may be able to lower the financial requirements to help get you a credit card with a very low limit. A good track record will show your bank or favorite store that you pay on time and you will be a good credit risk for them. Even though a retail store credit card will usually have much lower limits than more conventional credit cards, that’s okay because you just want to use that credit card to start building a long, strong history.
Step #3 – Learn How To Improve Credit Score
If you’ve ordered your credit report and it shows that you have a credit history but you are still paying too much on rent, insurance and credit card interest rates, it’s time to not only check out your credit score but to also understand why that score is so important. Credit scores have such a big impact on your financial life. Your score could be costing you money without you even realizing it.
Your credit score is broken down into five parts: your payment history (35%), what you owe (30%), your history (15%), the types of credit you have (10%) and any new credit accounts you add (10%).
Payment history (35%)
With payment history being the most crucial to your overall score, let’s start with that. Creditors want to work with clients that will pay them back. To prove that you are a good credit risk, never, ever make your payments late, not even a few days late.
What you owe (30%)
This is sometimes referred to as your credit utilization ratio. It is the comparison between your credit limits and your credit balances. You want this calculation to be as low as you can, below 25% if possible.
Credit history (15%)
This is the length of time that you have been tracked by a credit report. The longer the history, the better because creditors see you as more creditworthy.
Types of credit (10%)
You look better to creditors if you have a mix of secured/unsecured and installment/revolving credit. In other words, an auto loan and a mortgage instead of just all credit card history.
New accounts (10%)
You do not want to go out and open lots of new credit accounts if you are trying to improve your credit score because that actually brings your credit score down. This 10% of your overall credit score is calculated by comparing your newly opened accounts to your total number of active accounts.
Now that you have a better understanding how important your credit score is this may be a good time to double check your spending and payments patterns and adjust them if need be. If you have not established a credit history yet, this is the absolute perfect time to create good spending and payment patterns. Why wait to start saving money. Learn good financial habits when you first start out…it’s easier that way.