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The harsh truth is that good credit doesn't build itself. You need to be proactive. Getting and keeping a good credit score can save you a lot of money over the long run. If you have a good credit score you can lock down lower interest rates and make larger purchases such as taking out a mortgage. If your goal is to build good credit, you should start soon and start small. Make a few small purchases with your credit card and then immediately pay for them. When you make small purchases and pay them off immediately this will help you build good credit habits early on as well as a good credit score.
An even better idea is to start with a secured card. If you're not familiar with this type of card it's where you deposit money with a bank – usually $300 or $500 – and then use the card to make purchases until your balance reaches zero or near zero. At that point if you want to keep using the card you will need to deposit more money. There are two good things about a secured card. First, it prevents you from creating debt. Second, how you use the card will be reported to the three credit reporting bureaus and, assuming you use it sensibly this will help you build a good credit score.
Your credit limits aren’t just suggestions
When you got that first credit card and saw it had a limit of $2500 that was pretty exciting. Just imagine! You instantly had $2500 at your disposal, right? Well, yes and no. Just because you have a credit limit of $2500 doesn't mean you should use it. Most financial experts say that you should keep your credit utilization or how much of your limit you’ve used below 30%. This means is that you should use only 30% of that $2500 or $1500 total. The reason for this is because your credit utilization counts for approximately 30% of your credit score. If your credit utilization were 40% or even 50%, this would definitely ding your credit score. Do the math. If you find that your credit utilization is above that magic 30% you need to either get to work paying down your balance or open another credit card so that your credit limit would go up accordingly.
Your credit score will ultimately depend on your financial philosophy
Whether you have a good or bad credit score will ultimately depend on your financial philosophy or whether you're an ant or a grasshopper. If your approach to finances is that of an ant where you're saving money, paying off your balances on time every month and have an emergency fund, you’ll ultimately have a very good credit score. It may take a while but it will happen. On the other hand, if you're more of a grasshopper – if you spend money as fast as it comes in or if your approach to debt is that of Scarlett O'Hara and "I'll worry about that tomorrow" – it’s absolutely certain that you will end up with a poor or bad credit score. And a bad credit score will cost you money in the form of higher interest rates, higher insurance premiums and might even prevent you from renting an apartment or house.