“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb
Many people never thought or care about credit score until they face a shock of denied credit card application, high mortgage or car loan interest. If you are thinking why I ever going to need a credit score.. read here. (Why credit score?)
Before getting into actual steps to get better at credit score building, prepare your mind for a goal. It could be getting a credit card with higher credit limit, planning to buy a car,refinance a high interest loan or even buying a new Home. You need good credit to receive all these luxuries. To achieve any goal you need two things - Discipline and mindset. There is no quick fix for building credit score, its a long term endeavor, it should be like a habit. But if you stick to this plan you will improve your credit score and as a byproduct, catch a good personal finance habit.
Applying for credit card:
If you don’t have a credit card you need to apply for one to get started. If you are employed, go to a bank or credit union to open an checking account, as an addon deal get a credit card. Even with small credit limit. If the credit card was denied get an secured card. <href FAQ>Try to refer quote other banks to break a deal. Check with your HR if they have any deal with a bank.
If student, get the help of parents (cosigner) to piggyback on their credit. And there are many deals specifically for students. http://www.nerdwallet.com/student-credit-cards
Once you received a card with some credit limit, Think like the balance available is not for spending its for building credit.Money available in account is tempting but thats not yours yet (my parents used to say on items bought on loan as "Its not ours until we payoff”. I hear “Then why credit card after all”.
Big idea : get a no fee and 0% apr for first year card . No reason to go for a fee card
Only 20% for spending:
Never spend more than 20-30% of allowed limit. This is the key concept - if you have 500$ credit limit you can spend only 100-150$, if you have 1000$ credit limit you can spend only 200 to 300$. Yes its hard not to spend the money you have. Think in the shoes of your father, when you are kid if he gives you 100$ (must be huge at that time) for pocket money, then he naturally expects you to spend it wisely, what he would think if you spend 80$ buying candies. Next time he will give you far less than 100$ for sure because 80$ for candies is out of normal. You might have seen a smart kid who gets decent pocket money all the time, their trick is to prove their parents that they are good with money. They learnt the system earlier, good for them.
The Best approach is to put a recurring bill like cable or phone in this card and automate the bill pay. Then hide the card somewhere. If accidently you went over 30% for a month , try atleast to bring it back to 20%
No Late pay “Never”:
No late pay never. If you do, it will take more than 6 months or more to recover the points. This will become a big alert in your credit report. On time payment is a big measure for banks to gauge credit user's discipline. So never let accidents happen here, "prevention is better thsn cure". The best way to handle late payments in by monitoring you accounts using mint.com. For unavoidable reasons if you u missed a bill pay - call the customer care and tell them a good reason for missing the payment. Get support of your track record "I never paid late before, you can check my records. I'm very concerned that this late fee will impact my credit score." (call dont hesitate!)
Big idea : don't hesitate to call customer care. That might be annoying sometimes but worth the effort.
Don’t apply for good cards very soon:
Don’t get tempted to apply for unsecured card so soon. As soon as you got your first card and start spending there will be lots of credit card offers in your mail and email (Banks now knows you and want to make a spender out of you), very tempting indeed, dont fall for the trap please. Because 50% of the time you wont be approved during the initial credit building process or you will get a feeble 500$. Not worth the hit it makes in your credit report and score. Just be happy that you are becoming popular in banking circles.
No crap card:
No for departmental cards - this is another fish stores throw at us, atleast dont do it until you reach a decent 720. On another perspective getting a store credit card will limit you buying from the same store and limit your options. What I would suggest is to go for store credit cards once you got the discipline and capacity to pay off balances every month completely. Don’t fall for 20% off on today’s purchases, this is nothing when compared to credit impact and interest rates, and important thing to note is most of the store credit cards are not 0% APR.
Last thing - How long you have a history:
Banks also looks for the Average years you have a credit record, the longer the better. This shows the credibility, persistence and discipline of the borrower. This is one of the hardest part of credit building, because it takes time not tricks. Two things to keep in mind 1. never close a card especially the older ones unless it has too much fees 2. If you are applying for more cards, space it out between years, in this way the average will not be brought down drastically.
Monitor:
You need to be on top of your finances, you need to monitor you expenses, payment dates, spending capacity, credit score etc. Relax! Don’t get overwhelmed of managing your finances, luckily someone did the work for us. There are numerous awesome tools available to manage and monitor your finances, and they are free!. To begin with creditkarma.com for creditscore monitoring and mint.com for personal finance monitoring.
mint.com
This is a cool service allows user to track bank,credit card, investment, and loan transactions and balances through a single user interface as well as make budgets and goals.
creditkarma.com
A free service for managing personal credit and finance in US. It provide free credit scores, credit reports, and credit monitoring form TransUnion and Equifax. The other cool thing is credit karma provides credit tools, such as the credit report card, which summarizes a consumer’s credit report into categories with an A-F letter grade. A credit score simulator,which simulates the effect of certain financial actions on credit scores.
