Being able to pay cash for everything used to be a great thing a few decades ago. It used to be that a person could just walk onto a car lot, pay in cash, and then take off with a brand new vehicle. It’s not like that anymore though: these days, you need to have credit, and preferably good credit, for nearly any big purchase you want to make!
The crazy thing is, in school, we had math classes and economics classes that taught us about money and certain aspects of finances, but the class never dove into credit…which is ironic, since credit has come to dominate so many areas of an individual’s financial life, including such things as mortgages, car loans, and even employment opportunities.
There should really be some type of life skill course taught to kids in high school to prepare them for the real world. The ideal class would teach young people how to fill out checks and money orders, how to create a resume, and explain the in’s and out’s of credit. Those are real life skills that need to be taught early, and would definitely help many young people from finding out the hard way just what poor credit decisions will do.
That’s just been a thought I’ve had for a long time. I truly feel that if credit was taught in schools, it would eventually lower the debt rate in America, but I digress. The bottom line is, if you want to be a trustworthy, low-risk candidate in the world of credit, then you need to have good credit. I’m going to give you the short version of the credit class I described above, and this Credit 101 lesson will help you start building a strong credit score, starting right now.
Make Your Payments on Time
Paying your bills on time is a basic step that everyone should do every time, whether it’s paying something that affects your credit or not. It’s just a good habit to have that will eventually pour over into other aspects in your life. As far as credit is concerned, you definitely want to pay your bills on time, but paying them early is even better.
For example: when using credit cards, your billing cycle can range anywhere from 29 to 31 days. Now, the last day of your credit card’s billing cycle is called the closing date. Keep in mind, your billing cycle’s closing date isn’t the same as your payment due date, but whatever balance your credit card has on the close date is what your credit card company will report to the credit bureaus. So if you can make a payment before your actual close date, that will lower your total balance, and look better on your credit report.
Let Your Accounts Mature (Keep Them Open)
Everyone’s financial situation is different, and conditions will vary from person to person. The amount of time it takes for one person to establish good credit will most certainly be different from the next person’s, and that’s okay. There are quite a few contributing factors as to why this is so.
When lenders look at your credit history, they’re not only looking at whether or not you’ll be trustworthy enough to repay your loan on time, but they’re also looking at how long you’ve had credit.
The longer you’ve had an account tells them that you know how to use credit, and if the accounts on your report are in good standing, they’re more likely to believe that you’re a good candidate to lend to. It shows that you’re not only credit-worthy, but you’re responsible too. Luckily, there are loan options out there for individuals with with bad credit too. These options will definitely help you on your journey to building a strong credit history.
As far as how long it takes to start your credit, a good rule of thumb would be to give yourself at least six months of having one account reporting to the credit bureaus. Six months is a good amount of time for the credit bureaus to populate a credit score based on your payments.
Check Your Credit Report
Checking your credit report is really the first step to finding out your credit health in general. You have to check your report in order to know what areas and steps you need to take when trying build a strong credit history.
When you check your credit report, you will quickly see that there are numerous factors that make up your overall score. Your credit report will consist of your payment history, number of accounts, derogatory marks, age of credit history, credit card utilization, and hard inquiries. Those factors are further sectioned off into categories of impact (how it affects your credit score). You have high impact, medium impact, and low impact.
For those that are not aware, your typical monthly bills do not affect your credit score. Bills such as rent, utilities, cell phone, car and renters insurance, and cable will not affect your credit score, but the moment you become delinquent on them… that’s when it will be reported to the credit bureaus!
It’s really not fair is it? But that’s just the way things work. It’s almost like being on a job, and you do your job well, but the moment you make one single mistake, that’s when your boss wants to come down hard on you! It’s almost as if you can’t get any credit for doing good, but the moment you mess up, your mistake is the only thing that anyone’s paying attention to.
Correcting discrepancies on your credit report could make the difference of your credit report going from bad to excellent. One of the biggest misconceptions about checking your own credit score is that it brings your score down. Because people think that, they rarely check their credit. Not checking your credit can actually hurt your score, because there could be an account on there that brought your score down and needs to be disputed, or payment that registers as late, even though you paid it on time.
By the time you decide to check your credit report, your score could have dropped several points. It wouldn’t be too late to correct it or anything like that, but as soon as it hits your report, it can do a considerable amount of damage. So please do yourself, and your credit score a favor, and keep up with your credit report and scores.