5 Steps to Building Great Credit

Creating and maintaining great personal credit is one of the fundamental steps in being an adult. Without stellar credit, you will find it difficult to make important large purchases such as buying a new home or car. More importantly, even if a bank does provide you with some type of personal loan, poor credit generally means you pay a higher interest rate. If you want to know how you can build a solid credit rating and maintain it, follow these five tips.

Build Credit the American Way!

1. Start by Building Great Personal Credit

Getting started can be difficult. After all, how can you buy something on credit if you don’t have credit already established? Here are four helpful steps you can employ.

  • Open a checking and/or savings account – All it costs to open and maintain a bank or credit union account is the amount of money you want to put into the account. What this does is demonstrate your responsibility and stability, and it provides a financial history that lenders will look at when considering whether to extend you credit. Accounts in good standing show you know how to manage money.
  • Establish a stable residence and employment history – Lenders look at how long you’ve lived at your current address and worked for your current employer to determine your credit worthiness. Creditworthiness is the measure of whether you’ll repay or default on a loan.
  • Start small and build slowly – Don’t expect to jump in and make a big purchase right away. Begin by getting the utilities in your name or apply for a gasoline or department store credit card. Then be sure to pay your debt on time each month.
  • Learn how to interpret your credit report – It is important that you start early with this step. You can certainly use a 3rd-party provider, but I generally don’t recommend that; rather, you need to go directly to each of the three primary credit reporting agencies (CRA) since each maintains a separate credit file about you that may be vastly different from the others. Each bureau has its own data format; so, its crucial that you learn how to interpret the credit reports provided by each CRA so that you can monitor those files efficiently. If you see any inaccuracies on one of your files, you will have to file a formal dispute directly with that credit bureau (and any other CRA that shows inaccurate information). On the other hand, if you work with a 3rd-party provider, you will discover that they will generally provide you with a credit report from just one or two of the credit agencies that they happen to do business with, rendering the monitoring process incomplete.

However you choose to get started, it’s wise to build your credit slowly. That way when you’re ready to make that big purchase, you’ll get the best loan amount and interest rate possible for your great credit score.

2. Use Credit Wisely

Credit monitoring companies determine your creditworthiness by using a scoring model that takes into account factors such as your current income, repayment history, and credit usage. To keep these factors in good standing requires you to use your credit cards wisely. Here are three tricks to help you do just that.

  • Read the fine print – Know the interest rate, annual fees, late fees, introductory rates, balance transfer fees, and any other costs associated with the card. Additionally, read your monthly credit card statement. You may think all you need to do is make your payment and that’s the end of it. However, experts recommend reviewing your monthly statement for accuracy. Specifically, ensure there are no unexpected charges (including those fees), that you agree with the current balance, and that you’re not the victim of fraud.
  • Make more than the minimum payment each month – Credit card companies are now required to show on your monthly statement how long it would take to pay off your card if you made only the minimum payment due. The longer you take to pay the more interest accrues. The best way to avoid interest on your credit card is to pay it off each month. However, if you can’t pay it off, at least try to pay more than the minimum balance.
  • Don’t use credit when you can pay cash instead – Sometimes there are situations out of your control, like an unexpected medical or maintenance issue. Using a credit card to pay an unusual expense may be the only way to go. Otherwise, paying cash for regular day-to-day items is the wisest move.

Credit is a great financial tool, but only if you learn to use it wisely. When you use it, make sure that’s your only option.

3. Take Steps to Retain Great Personal Credit

Getting and retaining great credit really isn’t that difficult. It’s a matter of using common sense. Here are five common sense rules to help maintain great credit.

  • Don’t overuse it – To stay on budget, use cash whenever possible. Otherwise, you may find yourself trying to get out from under a stack of debt.
  • Watch how you spend – Before pulling out a credit card to make a purchase, ask yourself if you really need it. You may decide you can wait until you’ve saved enough to pay cash.
  • Pay on time – In addition to a late fee, even slightly late payments may lead to an increase in interest rates and a decrease in your credit score.
  • Don’t exceed limits on credit cards – According to Experian, exceeding the limit on your credit card may affect your creditworthiness. If it occurs once and you correct it quickly, it will likely have little effect. However, if your balance hovers around the limit and you routinely go over, that’s a problem. You might see an increase in your interest rate as well as penalty fees. Great credit is all about being smart when it comes to using credit cards and repaying debts on time.
  • Be proactive – Your hard work will be for naught if you miss a payment or make any other financial error that negatively impacts your credit report. However, oftentimes, negative information appears inadvertently and you should take immediate steps to dispute such entries. The dispute process is a legal consumer credit right provided to you via the Fair Credit Reporting Act (FCRA) and is a powerful tool when it comes to fixing your credit.

4. Check Credit Score Free Online

Statistics suggest that well over one-third of American adults (37%) don’t know their own credit score. Why is this important? Here’s what knowing your credit score does for you.

  • It helps you understand your purchasing power – Your only hope for buying a home in the future is to know where you stand today.
  • It lets you stop potential problems – A credit score that suddenly begins to decline when you’ve made no purchases may indicate fraud.
  • It allows you to stay on track – Once you mess up your credit, it takes a very long time to correct it.
  • Know where you and your credit score stand – Check out free information at credit or creditkarma online or apps. Better yet, set up monitoring accounts directly with each of the three bureaus: experian, equifax, and transunion.

5. Periodically Review Your Credit Reports

People sometimes use the terms credit score and credit report interchangeably. However, they are different.

Your credit score is a three-digit number awarded by a credit bureau. The three credit bureaus (or credit-reporting agencies) are Experian, Equifax, and TransUnion. They each calculate your credit score based on their formula (so your score may vary) and assign a number between 300 and 850. A high score is best. The national average is 691.

Your credit report, on the other hand, is a history of your credit information. It contains details about current open accounts and balances, accounts you’ve paid off or closed, delinquencies, credit inquiries, and such. This information is what the credit-reporting agencies use to determine your credit score.

Monitoring your credit report from all three agencies is an important step in protecting your credit rating. You can do it free once a year (annualcreditreport.com). However, if you’re not in the market for a large purchase, you may want to spread them out over time – say, one every four months. Then you can watch for expected (or unexpected) changes throughout the year and dispute any inaccurate credit information that you find in your credit file. Whatever you do, mark your calendar so you’ll know when you can make your request.

Gaining and retaining great credit isn’t difficult if you take the time to understand the ins and outs of maintaining your creditworthiness.