Building a Strong Credit Score

There are so many financial magazines and blogs out there with all different types of advice to save/make money.  Cut down on your lattes!  Get this stock for 2014!  Find cool rocks and give them to people as gifts!  But not everyone drinks lattes, is into the stock market or collects pretty pebbles.  Certain things works for certain people.  But one thing that can time and time again save you the most money possible throughout your entire life is having a good credit score.

The importance of having a good credit score is sometimes overlooked because of two main reasons.  One, it can be boring as heck to read about.  Just hearing the word “credit” can male people eyes glaze over.  Then they wonder what a credit score is, the difference between a credit report and a credit score, followed by the “No way, I have to pay for my score??!!”.  The other reason credit scores can be overlooked is because it takes time to get a credit score.  We’re talking about months to years.  People want results NOW, not a few years from now.

I previously wrote about how quickly a credit score can be ruined.  It is usually harder to build good things than it is to destroy them.  So this post will be for those who have little to no credit history and want to build a nice solid credit score.  For people whose credit is a mess and are on the edge of bankruptcy, this post is not for you.  It’s for those who have a blank credit slate and would like to take the smart move and have a good credit score that will serve them during their whole life.

FICO, the company that determines your credit score, has a neat little chart on their website that tells you what effects your score the most.  Being a credit newbie, the factor that is most against you is your length of credit history.  The longer you have a history of good credit practices, the better your score will be.  But this only makes up 15% of your score, so you still have an opportunity to get yourself a good score rather quickly.  The two major factors, payment history and amounts owed, are something you can work on right away.

The best way to start?  Get a good credit card.  Not one of those secured or student ones with $250 credit limits.  Just do a simple search with Chase or Citi, for example, and find a good solid rewards card to use.  Some rewards cards are usually reserved for high rollers, but if you opt for a simple cash back card with no annual fee like the Chase Freedom or Citibank Dividend, you should have no problem getting approved for one.  Plus you’ll get some cash back for your trouble.  Your credit limit will probably not be that high, but that’s okay.

Once you get approved for the card, just make some everyday purchases like gas and groceries, but watching that you don’t get too close to your credit limit.  You want to keep your “amounts owed” well below 50% of your credit line.  If you have a $1,000 credit line for instance, try not to charge more than $300, or 30% of your total credit.  Now when the bill comes due, make the full payment before the due date.  Rinse, lather and repeat for the next months.  After a while, most companies increase your credit limit.  If you have had 6 months of on time payments and haven’t seen a credit increase, just call and ask for one.

While that pie chart is good as far as telling you what constitutes your credit score, everything else is kind of muddled.  Should you wait 6 months before applying for your next card?  Or a year?  Exactly how many points does a credit inquiry cost you?  It’s almost impossible to find the exact answers to these questions, but if you’re just starting to build your credit, I would err on the side of caution.  Maybe wait 9 months before applying for a new card instead of 6.  Keep that credit utilization ratio at 20% instead of 30%.  A credit score is something that will help you for a lifetime, so it’s worth taking your time with it.

And that’s pretty much it.  Keep making on time payments (and full payments to avoid credit card interest), and you will be on your way to a great credit score.  A final note, there is a little 10% piece of that chart that is for types of credit used.  Essentially, they are saying the more varied types of credit you have (credit cards, mortgages, car loans, student loans etc.), the better your score will be.  This does NOT mean you should go out and finance a car if you can’t afford to.  This is only 10% of your score, so it won’t affect it that much.

The most important thing is to look at the big picture.  Pretty much everyone will have a mortgage or car loan at some point.  They’re not going anywhere anytime soon.  But to get the best rates for a mortgage, you need a good credit score!  So after years of paying your bills on time, check your credit score.  If it’s in the category that will get you the best rate for your mortgage, and if you can afford the mortgage of course, that may be a good time to get one.  The difference in interest paid between an average credit score and a great one can be tens of thousands of dollars!  That is real savings.  So if you keep that credit utilization ratio low and don’t miss any payments, you will be on your way to a great score.



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