Most people under the age of thirty-five honestly have no idea how to build 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, because every mistake 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 drops 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 paying it on time every month for at least a year, your credit improves. Similarly, a car payment—although it can be difficult to get if you’ve never had one—looks much better on your credit rating when paid on time. Young people, especially very young adults, can benefit by taking out a small loan of less than $1,000 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, as that is the only way a bank will lend even a small amount.
Important Tips for Building Good Credit
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. For instance, if you take out $500, they may request that you repay only $50 as a minimum. However, when you pay the minimum, the interest rate is so high that by the next pay period, you end up owing them $500 again, and the amount climbs from there. Thus, you can’t get rid of the loan without paying it all off at once. This information is typically hidden in tiny, hard-to-read print at the bottom of the website, making it seem like you’re getting a good deal. These types of loans are not good for your credit, they are not good for financing anything, and they are not good for your wallet. In fact, they can make a big mess out of your credit if you can’t afford to pay them off.
Learning how to build up your credit is something that ideally 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 other financing options available for people with bad credit or no credit. But instead of paying $5,000 for a car, you may end up spending over $8,000 if you make 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 for bankruptcy and still maintain a few possessions. Filing bankruptcy, in reality, wasn’t a big deal. However, the laws have changed recently. Now, filing for bankruptcy comes with more penalties, costs more, and doesn’t allow you to keep possessions such as a home or, in some cases, a car. This is important information to understand because bankruptcy is no longer the safety net it once was.
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 balance in one payment. This means maintaining a $500 credit limit, even when the bank is offering you a $10,000 limit, while you are learning how to build your credit. Having too many credit cards can lead to 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 better credit than if you are financing more than you can afford. What does that mean? No more than 60% of your monthly income should be allocated to necessities, including rent, car payments, food, utility bills, and other essential 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 tend to have 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 wages haven’t kept pace. 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 for everything they finance.
Learning how to build your credit is not always as easy as it seems. Going through mock budgets and working out accurate financial plans goes a long way toward building good credit. Most people can put together a budget for their bills, but they often overlook monthly expenses that add up more than they realize. Cigarettes, the daily stop at the corner store for coffee and an iced tea, gas money for those who like to drive around, and other seemingly small expenses catch up with you before you know it. These little purchases can hurt your ability to pay bills on time, which, in turn, hurts your ability to build good credit.
