Almost anyone can get a credit card at first, and the temptation to spend what you don’t have ultimately comes with it. Your credit score is basically a record of how well you can manage that temptation, how well you can pay off what you owe and how you manage your money in general. A good credit score is absolutely critical in these times and can mean the difference between getting that loan you need, the mortgage you want or the interest rate you’re approved for. By having a good credit score, banks and other lenders view you as low risk and are willing to give you more money at a much lower interest rate than if you were to have a bad credit score. Having a bad credit score can mean thousands of dollars in interest for you down the road, or you could get denied the loan entirely. However, you can always raise your credit score again with a few simple actions.
Checking your credit score
The first step to building your credit is to find out exactly where you’re at, so if you haven’t already done so, go to Equifax or TransUnion and check your current score. Your credit score will fall somewhere between 300 to 850 on the FICO scale and the higher your number is, the better credit score you have. Knowing exactly where you’re at is the first step to improving your score. You should be checking your credit score on a regular basis to ensure that everything is moving along according to plan. As you check your credit report for the first time (and every time thereafter) be very vigilant as mistakes can sometimes be made. If you find an error on your report, contact the credit bureau first either online or by mail. Make sure you are polite and professional and state clearly what’s wrong is so they can resolve the issue as smoothly as possible. This does happen so be sure you check! Be sure to dispute anything that you think should not be there as it can impact your score negatively if you leave it on.
“Won’t my credit score go down if I check it often?”
NO. This is a complete fallacy. Your credit may be affected negatively if possible lenders were to check it regularly, therefore meaning that you are applying for money from multiple sources, however, if you are simply inquiring about your credit it will not affect it whatsoever. It is recommended you check your credit score and your credit report at the very least every year, if not every 3 to 6 months. So now that you know what your score is, how do you build your credit?
Use Credit
*Note: You must be 18 to apply for credit.
One of the most important things to remember is that although buying everything with cash seems good in theory, you will never be able to build up your credit if you never use any credit to begin with. You have to have some credit available to you so you can show the banks that you are able to handle your finances even when tempted with large amounts of immediate money. Apply for a credit card or two and once you get it, be responsible with how you use it. Spend some money on it, but be sure to pay it back later on and whatever you do, don’t miss your deadline for your credit card payments. Using your credit to the maximum allowable amount may also negatively impact your credit score, so be sure there is always room between what you owe and what you have available to you. Remember though, that having a lot of credit which is never used isn’t necessarily viewed positively by lenders; when you get credit be sure to use it, just remember to be responsible when you do. Credit also takes a while to form, so don’t be discouraged if your score is not immediately increasing 6 months after you get a credit card. Just continue using your credit regularly, making your payments, and staying away from being at your limit, and your credit will form slowly but surely.
The amount of credit you have
A key factor in your credit score will be how much credit you actually have. If you handle your finances responsibly, but only have one credit card, your score will most likely not be as good as someone who is responsible with a few credit cards, a line of credit, a car loan, school loan, a mortgage and investments. The more lines of credit you have that you are able to handle well, the higher your credit score will ultimately be. Banks and other lenders like to see that you can manage a variety of different types of credit. However, don’t go out and apply for everything you can get your hands on all at once; it won’t help your score if you look desperate for cash fast by applying for many different money sources as possible. Apply for a credit card or two at first, take it slow and go from there. As a ballpark time frame, you should wait 2 years between applying for a new form of credit. Keep in mind that anywhere you go to apply for credit, whether it’s at a bank or a private lender, they can have access to your credit reports so they can see if you are a low or high risk candidate.
Make your payments on time
I cannot stress the importance of making your payments on time each and every single month. Any late payment will stay on your record for 7 years, so it’s better to just pay the required amount by the required time, even if you’re just making the minimum payment. The easiest way is to make a payment on all the credit cards you have at the same time each month, so it grows into a habit. For example, make your payments on the 1st or the 15th of each month so you know exactly when it’s due. Make sure you mark it down in your calendar for the first little while until you get used to doing it automatically! It is also important to pay at least the minimum amount required, so don’t just guess at how much you pay; pay the minimum amount on everything first, then if you have some extra money you can pay off some more, but at least this way you know for sure that all your payments are taken care of until next month.
Pay down your debt
An important factor in building your credit is the amount of debt that you currently have and how well you are doing paying it off. Are you making decent sized payments or are you just putting down the bare minimum each month? If you’re only putting down the bare minimum each month, most of the money you’re paying will go straight to interest and will barely even touch your actual debt amount. The more money you have available to you through your credit sources the more your credit score will be positively affected. Ideally, try to keep your debt at or below 30% of the total amount that is available to you. If you’re trying to pay down your debt, focus on getting all of your credit cards down so there is a big gap between what you owe and your limit, before you start focusing on paying one off entirely. By paying down the money you owe, you’re showing the banks as well as other possible lenders that you are a low risk loan candidate since you will pay back the money you owe in the future as well.
Investing
The next thing you should consider to further your score is to start saving or investing some of your money on a regular basis. Even just $20 a week into a RRSP or a TFSA (tax free savings account) can add up quickly and help you down the road if you need to apply for a loan. Investing your money (even just a bit) shows you are responsible with your finances and thinking about the future. If you’re not comfortable with investing your money, start a savings account and start putting money into it every time you get paid. Having a bit of an emergency fund can also help you out if you lose your job, or if an unexpected expense arises, so it’s good to have, even if you aren’t actively working on your credit score.
Be patient
Building up your credit score takes time and patience so don’t expect massive results in a short period of time (like a year), even if you do follow all the basic rules. Banks and lenders want to know that you are financially stable for the long-term, not just for the next month or two. Find a balance in your finances and stick to maintaining them. Time is a very important factor when it comes to your credit score, so just be patient and keep at it! Results will come sooner than you think and your credit will increase over time.
The image used in this post is taken from Image: FreeDigitalPhotos.net
