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Credit scores are just one of those subjects not taught in high school, unfortunately. Most folks head into their adult years knowing little to no information about what a credit score is, what it’s based on, how it’s used to determine approval of large purchases, and most importantly how to build your score over time.
Thinking about it now, I really wish I had a course available in school to learn about and prepare for financial scenarios such as purchasing a vehicle, applying for a credit card, and of course getting approved for a loan on a home.
For years growing up, I thought my parents had just saved up every dollar they ever earned to buy the house we lived in. But the more I twiddled my thumbs on the subject the more I realized that just couldn’t be the case, as they had two children to feed and provide for, as well as many bills to pay every month.
The answer all along was having a fair credit score.
That’s right, fair. Not excellent, not perfect – just fair. This was something they worked to develop over time and continued to build even higher through the years.
So, how can you do the same?
Well, let’s start with the basics, discuss the different levels in credit scores, and what you can do in order to improve your credit score no matter the shape it’s in currently.
Remember, a work in progress – is progress nonetheless! So, let’s get started!
What is considered “good” when it comes to determining credit, and how is that number achieved?
Let’s break down each level to better understand them:
So, where does your score fall within these levels, and what does that mean for you?
If you’ve scored in the 700 – 850 range, congratulations! This means your bills are routinely paid on time, your debt-to-income ratio is well managed with reasonably low balances, and you aren’t showing as a high-risk to lenders. This score helps with approvals for large financial purchases like furniture, vehicles, boats, and real estate.
Now, if you’ve scored in the other two categories, that’s ok – no need to worry! This is not the end of the road for you, in fact – it is just the beginning!
We have some helpful tips we would like to share in hopes to improve any credit score level!
If you don’t have a credit score, building good credit is important and can help you qualify for lower interest rates, which helps you save money. That’s always a great motivator! The possibilities are endless with those potential savings.
No matter where you are on the credit spectrum, you can make improvements to your score. Let’s go over a few of our favorite options:
• Apply for a Credit Card – It’s important to note that having a credit card does not mean unlimited spending of free money. In fact, it is more of a buy now – pay later method. This comes in handy for example when an unexpected expense arises, and you don’t have the funds immediately on hand. It is expected, however, to be paid off monthly or some folks even like to pay it off all at once!
A tip I was lucky to learn early on was to buy my gas with my credit card. It’s an expense I was expecting to pay anyways, so I would just pay it off immediately once I got home from running the rest of my errands. This method is an easy way to use credit, without letting the debt pile up and slip out of your control. It certainly helped me while I was in college to learn how to manage my credit little by little.
• Become an Authorized User – If the first credit building option doesn’t work for you because you are unable to apply or get approved for a credit card, then this second option may be a great stepping stone in the right direction. Becoming an authorized user is when you’re added to someone else’s credit card account which allows you to benefit from their positive credit activity. Now, you don’t want to hop on just anyone’s account, you want to make sure that the account owner is someone you know like a relative or friend that you can trust to be responsible and keep up with their regular payments.
This option would be great for parents with high school age children, maybe before they head off to college, in order to set the child up with some positive credit history under their belt.
Applying for a loan or credit card without a credit score is kind of like applying to your first job with no resume, how is that employer supposed to know if you will be an asset to the team, or financial risk to the business?
By setting yourself or your child up with credit history ahead of time, the process of applying for a credit card or a loan later on will be much smoother seeing as there is a positive report recorded, so it’s a great option to consider.
• Report Your Rent – Yep, you ready that correctly! You can earn credit while renting your home. Not too many folks are aware of this option, and that’s the very reason why we felt it was important to bring it to our reader’s attention. As it turns out, paying your monthly rent on time each month can pay off after all! Services such as RentTrack and PayYourRent help by allowing folks who rent their homes to report their monthly payments to the credit bureaus.
This type of service could be worth exploring if you always pay rent on time and your credit needs some improvement. I certainly wish I had been aware of this option, as I personally rented for 8 years and earned nothing in return.
Now, depending on the company, you may pay a one-time verification fee, plus a monthly payment of $7 to $10, or your property owner may sign up for a larger paid subscription. But a small fee for a positive result that will help you in the long run may just be worth it!
Credit scores don’t always have to be poor in order to feel the need to improve them. Like we mentioned near the beginning of this article, these are tips meant for any level of credit. We wanted to share the importance of building as well as maintaining a healthy score!
Here are some things that lenders look for when taking your credit history into consideration:
• Save Your Money When You Can – Creating a healthy saving routine every time you’re paid, or as often as your budget allows, will show a few things: 1. A lender sees your funds continually building over time. 2. You’re less of a risk knowing you have access to available funds to depend on when, if at all, needed.
• Keep Your Accounts Open – Even if this isn’t your primary checking and savings account, keep it open with just the minimum requirement remaining in the balance. This represents longevity and a source of positive banking history, so long as no automatic payments are withdrawn. We want to avoid having a negative balance.
• Positive Balances ONLY – Withdrawing more funds than what you have will result in a negative balance, which in turn signals an overdraft charge. It’s always a good idea to keep a watchful eye on your bank account balance as well as pending/processing transactions. It may say you have a certain amount available, but if a charge is still processing, it may not post until the next business day. So, in reality, you may have to do a little math and keep a running tally in your check register to know exactly how much you have remaining before accidentally over drafting from your account.
A helpful way to prevent this from occurring is by going into your account settings and turning on a minimum requirement alert, this will notify you when you are getting close to using more money than you actually have at the moment.
• Payment Consistency – Did you know you can schedule the due date for your monthly bills? It’s true in most cases, and this will help avoid missing a due date! It’s really important to make your full payments on time, every time! On-time payments show discipline and consistency, which makes you less of a risk in the bank’s eyes.
A helpful tip here would be to go through all of your bill due dates, and align them with how often you get paid.
For example: If I get paid on the 1st and the 15th of every month, it would be in my best interest to split my bills in half. Not in amount of course, what I mean by that is I would pay half of my bills on the 1st, and the rest on the 15th. That way, I am not using an entire paycheck for all of my bills at once, nor am I having to remember to pay each bill on their separate due dates.
Make it easier on yourself, you have more control over this than you may know!
Ultimately, no matter which credit-building strategy you choose, many of the same rules apply. Some things to keep in mind after reading this article is that having any type of credit is always going to be better than having no credit at all, consistency and positive patterns in your payment history is absolutely key, and it is not the end of the road if your credit score is low – it’s just the beginning!
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