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Building and Improving your Credit

The way you manage credit says something about you. It impacts the cost of borrowing, 60% of employers pull credit before hiring and auto insurance and cell phone companies offer lower rates to customers with good credit.

It is important to establish and build credit. You are likely going to need it to purchase a home in the future. 

 

FICO Score Composition

Payment history:

35% of your score is based on whether or not you pay on time.

  • Make your payments on time.

Credit Utilization Ratio:

30% of your score is determined by how much of the available credit you are using

  • Open one or two cards (VISA, Master Card, AMEX, Discover—not store cards).
  • Try to limit your use to things you would purchase anyway: gas, cell phone bill, etc.
  • For the best score, try not to use more than 10% of the credit available to you—once you exceed 30% your score will really suffer.
  • Avoid using them for discretionary spending like dining out, clothing and vacations—it is too tempting to overspend.
  • Use them lightly but regularly and pay them off in full each month—this improves the payment history part of your score.
  • Pay them off in full each month.
  • Regularly request an increase in your credit limit.

Paying off/paying down balances owed is the quickest way to improve your credit.

Length of credit history:

15% of your score is determined by how long you have had credit

  • You begin to establish credit with the first loan you take or credit card you open.
  • Like bad information, good information falls off your report in time—so consider keeping your first credit card open as long as it is practical.

New Credit:

10% of your score reflects new credit

  • Although it impacts your score for only one year, "hard inquiries” or attempts to get new credit remain on your report for two.
  • Avoid opening a bunch of credit cards or taking on new loans at one time—it can signal a potential buying binge.
  • They say that the scoring system now allows you to shop for loans to look for a competitive rate—no one will tell you your rate of interest without first pulling your credit—nevertheless we suggest being cautious.
  • Soft inquiries such as those from an employer, landlord, company sending you a credit card offer or those you pull to monitor your report do not influence your score.

Credit types:

10% of your score based on your mix of mortgage, installment loans and revolving credit (credit cards)

CAUTION: Do not let the tail wag the dog!

1) People tend to spend more when using plastic rather than cash.

2) It’s not a good idea to take out a loan merely to build your credit.

3) It may be tempting to carry many credit cards to improve your credit utilization ratio, but balance this with the risks of overspending, fraud and the inconvenience of managing so many payments.

4) Annual fees or service issues may make leaving an older credit card open impractical.

5) Leaving unused credit cards open to improve your credit utilization ratio can leave you vulnerable to fraudulent use of those accounts.

6) Assuming you pay debt down, the credit utilization ratio can change rapidly—it is merely a snapshot of where you were when those you owe report to the credit reporting agencies. Don’t worry if you exceed the recommended limits in a given month but then pay it off in full.

7) Time heals all wounds—including debt. Bad information falls off your report after 7 years and Chapter 7 bankruptcy after 10.

8) Do not obsess about your score. It doesn’t matter unless you are in the market to borrow. Employers and landlords review your report—not the actual score.

Other tips:

  • Ensure all positive information is reporting to the Credit Reporting Agencies.
  • Dispute all inaccurate information.
  • Resolve collections, judgments and tax lien issues.

If you pay your bills on time and make progress in paying down debt, your credit score is moving in the right direction.

Credit is a tool. Make sure you use it rather than letting it use you.

Credit cards do offer some buyer protection. The original company we hired to build this website did not complete the job and American Express returned every dollar. Had we paid cash it is unlikely we would have ever seen that money again.

Click here if you are having difficulty getting credit.

 

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