Most people under the age of thirty five honestly have no idea how to build up their credit or rebuild their credit in order to be granted things such as credit cards, car loans, and home loans. Credit is a lot easier to mess up than it is to build up, because every single mess up a person makes is recorded. What many people don’t know is that every time you apply for a loan (even those quick cash payday loans) and are turned down, your credit score tumbles even further.
Paying your bills on time is one of the fastest and easiest methods of building up credit. By having at least one utility in your name and being able to pay it on time every month for at least a year, your credit improves. As well, a car payment, which can be difficult to get if you’ve never had one, that is paid on time looks much better on a credit rating. Young people, such as very young adults, will do themselves a service by taking out a small loan of less than $1000 and making prompt or early payments until the loan is paid off. Of course, this small loan may require a co-signer and will definitely require a job, making it the only way a bank will lend out even a very small loan.
A word of caution. Stay far far away from payday loans, as they are not helpful in any way shape or form. If you read the fine print, their minimum payments seem reasonable. Perhaps you would like to take out $500. They request that you repay $50 minimum. When you pay the minimum, the interest rate is so high that for the next pay period you end up owing them $500, and it climbs from there. Thus, you can’t get rid of the loan without paying the whole thing off at once. Of course this information is hidden in tiny little baby print at the bottom of the website so it looks as though you’re getting a good deal. These types of loans are not good for credit, they are not good for financing something, and they are not good for the wallet. They are in fact good for making a big mess out of your credit when you can’t afford to pay it off.
Learning how to build up your credit is hopefully something that a parent or teacher took a moment to teach you, but don’t be foolish. They were serious when they told you that without good credit you wouldn’t be eligible for much of anything. Yes, there are car loans and whatnot available for people with bad credit or no credit. But instead of paying $5000 for a car you will have spent over $8000 if you made all your payments on time. It is much more economical to keep your credit as clean as possible.
Not too long ago, it was possible to file bankruptcy and still maintain a few possessions. Filing bankruptcy in reality wasn’t that big of a deal. However, recently the laws changed and now filing bankruptcy comes with more penalties, costs more, and doesn’t allow you to hang onto possessions such as a home and in some cases a car. This is important information to understand because it is no longer a safety door in the back of the room as it used to be.
If you receive offers for a credit card while you are trying to build up your credit, it is okay to accept one offer provided you are sure you can afford to pay off the entire allowance in one payment. This means maintaining a $500 credit limit even when the bank is offering you a $10,000 credit limit while you are learning how to build your credit. Having too many credit cards is begging for a bad credit score, even if you are paying the monthly minimum regularly. Home loans and car loans are harder to get when your entire life, including your groceries, is financed.
By financing only what you can afford to pay, you are obviously able to build up better credit than if you are financing more than you can afford to pay. What exactly does that mean? No more than 60% of a monthly income should be slated for necessities, including rent, car payments, food, utility bills, and other needs. By keeping a 60/40 ratio, that leaves 40% for savings and other desirable items. This is a maxed out ratio, and those who can achieve a 40/60 ratio end up having perfect credit as well as a substantial savings account.
This is not always easy to pull off, especially in today’s society where the standard of living is much higher but the wages haven’t followed suit. However, with a good job, a reasonable place to live, and a moderate car, people with good credit can make this ratio work because they are paying lower payments in everything they finance.
Learning how to build your credit is not always as easy as it seems. Going through mock budgets and working out financial plans that are accurate goes a long way toward building good credit. Most people can put together a budget for their bills, but they often overlook the monthly expenses that they spend more money on than they realize. Cigarettes, the daily stop at the corner store for coffee and an iced tea for work, gas money for those with wandering feet, and other seemingly small expenses catch up with you before you know it and hurt your ability to pay the bills on time, which of course hurts your ability to build good credit.
