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Do you want to be able to buy a home with a mortgage, borrow money to buy your dream car or get a loan to start a business? If so, having good credit can help turn your dreams into reality.
Your credit score, which represents the quality of your credit, is an important measure of your overall financial health. It also helps lenders decide if you can borrow money — and if so, under what terms. While a good credit score can open the door to loans with the best rates and terms, the opposite is also true. A bad credit score can make it impossible to borrow money completely, at least not without having to pay exorbitant interest rates and high fees to do so.
With that in mind, it’s smart to build credit now and for the rest of your life — and maybe even Before You are in a position where you really need it. By building credit and increasing your credit score, you can ensure that you get the credit you need for whatever financial situation you find yourself in. Let’s look at some of the best ways to build credit so you can open doors to new financial options.
Credit starts with your credit report, which is a list of all your current and past credit accounts, including credit cards, auto loans, and mortgages — basically any money you’ve borrowed from anyone, and whether you paid it on time. The three major credit bureaus — Experian, Equifax, and TransUnion — maintain these credit reports based on information reported to them by banks, credit card companies, and other lenders.
But the credit report itself is just a list of accounts and information, so lenders and their partners have developed algorithms to turn that list into a certain score. This is where the credit score comes in.
There are several different types of credit scores, but we will focus on the FICO scoring method for the purpose of this guide, as FICO scores are the most commonly used credit score and used by the majority of lenders. The FICO Credit Algorithm was originally developed by Fair, Isaac and Company, from which it got its name (FICO).
When it comes to FICO credit scores, each three-digit score usually falls between 300 and 850, and higher scores are generally better. The FICO scoring method takes into account the following factors when determining your credit score:
- Payment date (35%): How often you pay bills on time and whether you have had any late payments in the past.
- Amounts due (30%): The amount of debt you owe in relation to your credit limits.
- The length of your credit history (15%): The average length of time that your credit accounts have been opened.
- New credit (10%): The number of times you have applied for a new credit account in the past two years (this is known as a “difficult inquiry”).
- credit mix (10%): The types of credit you have, including revolving credit, installment credit, and more.
With a FICO credit score, the quality of your credit is determined based on these ranges:
- Excellent: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: From 580 to 669
- Poor: 579 or less
Your FICO score does not have to be perfect in order to qualify for loans with the best rates and terms, but a higher score will make it easier for you to qualify for any loan, including a mortgage.
When you learn how to build credit, you’ll first want to know where you stand. With this in mind, you should take the time to check your credit score early in the process. Fortunately, knowing how to check your credit score is a piece of cake, since there are many ways to get a peek at your credit score for free.
Once you know what your balance looks like, you’ll have a better idea of how much work you have to do. Your best next steps for improving your credit can include any (or all) of these options.
One of the best ways to build credit is a secured loan or secured credit card. Either way, you put the cash as collateral to secure your loan or credit line, and you can then increase your credit score with regular, on-time monthly payments for any amounts you borrow.
Consider the Discover it® Secured Credit Card as an example of how this strategy works. This secured credit card, which has no annual fee, requires a minimum cash deposit of $200 to get started, which qualifies you for a $200 credit limit.
As you use the card and make monthly payments on time to cover the items you buy with it, Discover submits reports on your activity to the three credit bureaus. Over time, you can build credit through on-time payments this way. The Discover it Secured Card will refund your security deposit when you close or upgrade your credit card account in good standing.
Another option for building credit fast involves applying for a credit builder loan. With this type of loan, you agree to pay a fixed amount of money each month for a loan, which builds credit and adds to your savings at the same time. In the end, you’ll get your money back, minus any fees and interest you paid along the way.
The good news is that credit building loans are very easy to use, but they do cost money. For example, Self, a financial technology company, says that a building credit loan that costs $25 per month for 24 months will yield a refund of $520 and pay a total of $89 in interest and fees. Throughout the process, Self reports your loan history to the credit bureaus, helping you build credit with every payment you make.
There are many programs and applications that allow you to use daily billing to increase your credit score. The most famous of them is Experian Boost.
With this software from Experian, one of the three major credit bureaus, you can add bills such as your phone, utilities, and popular streaming services to your Experian credit report to improve your credit score. The good news is that Experian Boost is completely free to use, and you will also be able to see and monitor your Experian FICO credit score for free when you use it.
Another way to get credit building support is to get approved for a loan with the help of a co-signer. This co-signer may be a family member or partner, but either way, his better credit may help you qualify for loans in installments that you can use to build your credit history.
Through a co-signed loan, you have the chance to make payments on time which helps increase your credit score over time. However, you should only apply for credit with someone you completely trust, because late repayment or irresponsible use of the loan can harm your credit as easily as helping.
Finally, becoming an approved user of someone else’s credit card is the closest thing you can get to a jointly signed credit card. By having a family member or partner add you as an authorized user of their account, your balance can benefit from their on-time monthly payments and responsible use of credit.
Just remember that the primary account holder is ultimately responsible for paying for any purchases you make as an authorized user. And just like a syndicated loan, late payments and large balances that the primary account holder accumulates can affect your balance in a negative way, so make sure you are an authorized user of someone you trust and who also trusts you.
Ask any financial advisor, and they will tell you that a good credit score is worth its weight in gold. Fortunately, good credit is not only for the wealthy or well-connected. There are plenty of tools, services, and ways your friends and family can help you.
But in the end, building credit takes time, no matter how you do it. So by taking some smart steps early on and being deliberate about the way you use credit cards and loans today, you can enjoy the spoils of your good credit score for years or decades to come.
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