The Classy Owl

Building and maintaining good credit is very important for many reasons. Your score shows how responsible you are as an individual and if you are reliable. You will need it for potential employers while job hunting, if you want to rent or buy a home or car, or apply for a credit card or loan. It may seem confusing or daunting trying to understand everything there is to know about credit but trust me it’s pretty easy once you get the basics down. First thing first you will want to check your credit report and see if there are any discrepancies. Make sure to check it each year to keep it in good standing. An error can damage your credit. Credit scores are compiled by nationwide credit reporting agencies  like Transunion, Equifax and Experian. You can go to http://annualcreditreport.com to check your report for free. You can also purchase your FICO score report from http://myfico.com. Although scores can vary depending on when they decide to change it or which lender its coming from, most credit scores range from 300-850 in the FICO range. Each number falls under bad, fair, good or excellent credit. Depending on what your range is can influence your approval for a loan or credit and even a good interest rate. See where your score lies below.

• 300-599 Very bad
• 600-649 Poor
• 650-699 Fair
• 700-749 Good
• 750-799 Very good
• 800-850 Excellent

Establishing Credit

If you need to build it from scratch because you have no credit or bring it back form the dead because you have bad credit there are a few areas you want to look into to get started. One is to apply for a secured credit card. With a secured credit card you make a deposit that is refundable when you close the account as collateral. This card is only used temporarily until you have established credit so you can apply for a better card in the future. Generally your credit limit is the same as your deposit. Store credit cards like JC Penny or Home Depot also help and are generally easy to get when you are first starting out though they tend to have low limits and high interest rates but are helpful if this is your only option. Only get cards from stores you normally shop at on a regular basis. If you don’t visit the store within 6 months it may not be worth it and they can close your account for inactivity and this can be bad for your credit. You can also get a credit builder loan. This loan is specifically designed to build your credit. Basically you take out a loan amount then make payments on it until it is paid off. Once it’s paid you get your money back and sometimes even with interest. Other ways are to become an authorized user on someone else’s card like a family member or spouse. Just remember if you go this rout you want to make sure you are responsible and have an agreement between the two of you how it will be handled such as what you are allowed to spend and if you will help pay the bill. And if you are making purchases on your side you should pay for them out of courtesy of course. There is a big level of trust involved with letting someone on your account that can damage your credit or put you in further debt so be respectful of that. And lastly you can become a cosigner on a loan. This is another one that is not taken lightly as you need to make sure you both are aware of the risks involved. But if you both are trustworthy this can be very helpful.

Building and Maintaining a Good Score

1. Pay Those Bills

Once you establish your good credit you just need to maintain it. First off you always want to make sure you pay all your bills on time. This has a very strong impact on your credit. If you have a hard time remembering to pay them on time consider putting all your bills on automatic monthly withdrawal through your bank account. This saves so much headache, your credit and possibly even money with those late fees if there are any. Missing/ late payments or any accounts in collections will damage your credit. They stick for a long time too. Some late payments can stay for up to 7 years and any bankruptcies can stay for 10 years. But don’t worry too much if you already have some damage. Get those collections taken care of and pay those bills on time. Your credit score is more forgiving over time and cares more about the most recent activity. So it will take a few months to come back but if you are diligent with it the bad will fade away. Paying down any debts also helps a lot. I have a lot of debt through many sources and though my score is good I can’t seem to get my range to budge any higher because of it so this year is my goal to kill it. I’m just plain sick of it and am going to throw everything I got at it. : )

2. Keep Your Balance Low

Pay your credit card balance in full at the end of each month. This will save you interest. Keeping a small balance is ok but don’t forget you have it. Whenever you use your credit card make sure to keep the balance below 30% (.30) of the limit allowed. Preferably 10% or lower is better and will help your credit skyrocket. The secret is having a great credit to debt ratio. Those few people with the highest of FICO scores around 800+ keep their balance below 7% of their limit. For example; if your credit card limit is $1000 you would only use $300 of that limit at a time. $1000 x .30 = $300. You can pay it off multiple times a month to keep it at or below that balance. So if you reach your $300 limit just make a payment on it and use it again for your next purchase. That way when it shows up on your report it shows you are using your credit responsibly and keeping a low balance. Maxing out your credit cards shows risk and that’s not what bankers are interested in. If you find your balance too low to keep up with work on getting a higher credit limit so your credit to debt ratio stays low. You can always ask for a higher credit limit if you have been keeping on time payments for a long period of time. It’s no guarantee but it doesn’t hurt to ask. If you can’t get a higher limit yet just keep raising your score and eventually you will be allowed to increase it. You can also check if another credit card will offer higher limits as well just be sure to not take too many at once as this will lower your score.

3. Build Credit Through Multiple Sources

Other ways to build your credit is to have loans. Things like car, student loans or a mortgage are very helpful to your credit. Now by all means this does not mean to go out and get any or all 3 if you don’t currently need any of them. But if you happen to be in the market for a new car it may be beneficial to get a loan on it instead of paying it in full if the interest rate is good. And if you are planning to go to school take out a loan to establish that credit and pay it off as quickly as possible over time to get that boost. Same goes for buying a home. Just be responsible about it. It helps to have a combination of a credit card and a loan balance of this type as it gives your credit diversity. I’ve always had a good credit score and always paid my bills on time for years but was shocked to find out I could not get a car loan without a cosigner because I never had a car loan before. All these things are taken into consideration. And lastly avoid opening too many accounts at once. New accounts and too many at once tend to lower your accounts age and that in turn lowers your overall score. A good rule of thumb is not to open more than 2 a year if possible and that includes credit card accounts as well as loans. Even those store credit cards like Macy’s or Kohl’s.

I hope all this information is helpful to you and wish you luck on your credit building adventures. I’m working a goal for myself from good (747) to being in the elite range of credit scores in the 800+ range. Hopefully we can reach our goals together whatever yours are. One step at a time and LOTS of patience is key. What are your goals for your credit score and what steps have you taken or plan to take to get there? I would love to hear your thoughts. Please leave a comment and let me know! I think we could all share and support the community together as a whole to complete our goals.