Credit is a big thing in the United States. It is how you open up credit cards. Your mortgage rates are based on your credit score. Plus having a good credit score can help you save money through interest rates that banks give you to buy things. It is time to improve your credit.
If your credit score is poor or you have no credit at all, this article will help you make it better. Credit is important. It gives banks trust that you will be able to pay all of your financial obligations. This is one of the first steps to establishing your financial history.
What is Credit?
When growing up, you may have made many payments with cash or even a debit card. The money comes out of your account. If you have no money you cannot buy anything.
Credit works a bit differently. The money that purchases items for you comes from a banking institution. The bank figures you will pay it back and lends you the money to purchase items.
If you go to a store to buy something and use a credit card. The bank is the one that purchases the item. Then you have the responsibility to pay the bank back for the purchase you made. That is how a credit card works.
A good credit score is based on the notion that you will pay back the loan. If you can pay bills on time and not leave any bills outstanding your credit score will increase.
If you are unable to pay bills and have creditors knocking on your door for payments then banks will see that you are not a low-risk, and your credit score will be lower.
Lenders score your credit in many different ways. The most famous is the FICO score, which stands for Fair Isaac Corporation. There is a range of 300-850.
300-650 = Poor or fair: Lenders may not want to lead to people in this category. They may also have a higher interest rate on any loans they may want to take out.
650-720 = Good: You should be fine with taking out credit cards and some small loans.
720-850 = Excellent: With this score, you will get the best interest rates on loans, and probably multiple credit card offers.
Three companies give each person a score to help with the FICO score. They are Equifax, Transunion, and Experian. Each company may give a different score, but they are based on 5 different categories
5 Categories for Credit:
Payment History (35%)
First thing any creditor will want to know is if you pay your bills. Creditors want to know if the individual will pay back the loan on time. Lenders want to know if it is a high-risk vs low-risk. This factor is the most important part of your FICO score. That is why it is 35% of your score.
Amounts Owed (30%)
This is basically the utilization of your credit. Banks want to know how much of your credit you are using. Rule of thumb is to keep your credit utilization below 30%. If you are maxing out your credit cards this may be a red flag to banks seeing that you could be over extended and not able to pay off your financial obligations. It is best practice to keep your utilization down.
Length of Credit History (15%)
Creditors take in account how old your credit history is. What they will do is find the oldest account and the newest account and make an average. They will also see when you first established credit, and how long it has been since you used certain accounts.
It is best to keep those credit cards that are fee free that you have had forever. Every now and then, make a purchase just in order to show the banks you are still using them so they do not get shut down.
New Credit (10%)
History has shown that opening up a bunch of credit cards in a short amount of period may show some risks. It is better to spread out applications throughout the year in order to not hurt your score.
Credit Mix (10%)
Creditors will also take a look at the different kinds of accounts of credit you may have such as a credit card, home mortgage loan, or any type of other loans.
How to find your credit score:
There are several places to look to locate your credit score. If you have a credit card there may be a possibility that it offers a free check of your credit. There are also several different websites that can do a check for free as well.
Knowing your credit score is a great way to save money if you are looking to purchase a home, refinance a home, or even purchase a new vehicle using a loan. It is better to know your score than to be blindsided.
Some Tips on Improving Credit:
If you have taken a look at your credit and noticed it was not as good as you had hoped, then it is time to start improving it. Here are some tips that can help you make a difference in your credit score.
Pay Your Bills:
One of the biggest things hurting people is they do not pay their bills on time. If you have a credit card make sure to pay it in full at the end of the month. Do not pay the minimum that the credit card companies offer. They hope you pay the minimum in order to put a large interest rate on the balance.
Always pay your bills on time.
Open up a Second Credit Card:
This is one way to create more credit for yourself. If you open up a new card you will have the opportunity to have more credit afforded to you creating a lower utilization of your credit. This will then put more trust in banks, which will higher your credit score.
A few years back, I opened many more credit cards when I was learning about travel hacking. In the process, my score jumped up 80 points. Ever since then, I have not worried about credit. It has been excellent for the longest time, and with a low credit utilization banks trust me more and keep upping my credit score.
Be an Authorized User:
Oftentimes, we have such poor credit that we need some help. Becoming an authorized user on another person’s account will help you to increase your score. It is like someone co-signing for you on a loan. They use their good credit to help you improve your own.
Don’t Close Unused Credit Cards
If you have some unused old credit cards that do not have a fee do not close them. That affects your credit history. Once that card is closed your score will be negatively affected, by the average of your history.
Low Credit Balance
Make sure to keep your credit balance below 30%. If it looks like you are using too much the creditors will bring down your score due to the risk involved. As long as your balance is quite low, you will be a low-risk to the banks.
A Word of Caution:
Credit cards are great tools to improve your credit, get cash-back, points, and use for purchases. As a word of caution, do not go over and beyond what you can afford. Being able to budget your money and not overspend is something that is imperative to having a good credit score.
Use your credit wisely. Do not overspend.
Keep working on your credit
I hope these tips and guidelines can help you with your credit. When I first learned about this it opened my mind to the numerous possibilities. It also gives you many more financial opportunities. This will also help with financial independence.
Keep working, keep saving, and keep improving your finances for your life. It only takes one step to start moving.
” Spend less than you make, stay out of debt, and invest the rest”
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.