These days, adulting requires having really good to excellent credit to buy things like cars and homes, so if you’re knew to all this, here’s my two cents on building good credit. Get it? Two cents. ha-ha.
In simpler terms, credit means financial institutions trust you. Whether you have none, bad, good, or excellent credit depends on how much financial institutions can trust you – very little, somewhat, or very much. Unless you can drop cold cash on large purchases, you’re going to need some form of credit from a lending company, most likely a loan or in the case of a home, you get a mortgage.
If you’re a fairly young adult, you’re probably going to start out with credit cards, which is nice, but be sure you’re handling them properly. You’ll need to maintain a good credit score as well as a good credit report. Both go hand in hand when lenders are determining your eligibility for purchases. Building good credit doesn’t have to be difficult. It’s easy if you just stay on top of your balances and payments.
Don’t carry a daily balance on credit cards.
You’re thinking – well, I can pay it off at the end of the month. That’s a good thing, which means you don’t need to be carrying a balance, so don’t do it. Your credit score and report are affected by many different factors; the main one is your average daily balance. The higher your daily balance is, the lower your score gets. Pay off purchases as soon as you make them, especially larger purchases that raise your daily balance. $0 is a good balance to have.
Cards with rewards over department store cards.
Not all cards are created equal. In my experience, lenders want to see cards like Visa and Mastercard accounts on your report. Rewards cards are great, because you get points and options to spend those points. Some cards let you use points earned to pay down your balance, which is excellent. Macy’s and Nordstrom cards are not going to make much of a positive impact on your credit. However, if you do have store cards, keep them in good standing, because they will have a negative impact on your score if you’re late or don’t pay them off. Department stores can be brutal when it comes to their credit cards.
Don’t be late on your payments.
Credit card companies can be vicious – one day late and they’ll hit you with ridiculous fees. If you’re sticking to carrying no balances, then hooray! You don’t need to worry about this one here, but if you do carry a balance, make sure you have alerts set up to let you know when payments are due. Auto-pay is a great option for those who tend to forget things. Auto-pay is your friend! If you’re sticking to manual payments, ensure you know your banks cut-off times for same-day payments. Some don’t have them and require 5 day holds for payments to take effect. Read your agreement.
Long-term credit over short-term.
When lenders look at your credit report and history, they look for long-term investments. They want to know that you can be trusted and that you have been trustworthy for a long time. Enter installment loans – like auto loans, personal loans, and mortgages. These are credit accounts that require steady payments over time. If you have an auto loan in your history, that’s a good start, because lenders can see that someone trusted you with a hefty purchase, and you delivered on your end of the contract.
It’s like with friendships and relationships – are you going to trust someone with a longer history of being trustworthy or someone you don’t really know? Lenders only have your credit score and report to look at, and that tells them everything they want to know. Unfortunately, student loans don’t really count as installment loans in the eyes of big lenders. Bummer.
Always keep your credit report up to date.
Building good credit requires a ton of maintenance. Your credit report is essentially your life’s financial history that will determine your financial future. These reports are updated and maintained by humans, and the one things humans can’t control is their tendency to make mistakes. Errors will appear on your credit report, and you can almost always fix a mistake if you catch it quickly enough.
You can speak with the lenders to update their report on you and enter notes as to why they reported such and made changes. People are scared of credit reporting agencies, but you don’t need to be scared. They’re not out to get you; they just report on what they know, and sometimes what they know is incorrect. So help them out, and help yourself out – keep track of your credit report. There are many credit score and report trackers online. I use Free Credit Report, and to check my credit score, I get free updates from my credit cards. Check with your lenders to see if you have that option too, as it is so helpful! Remember credit scores and reports are two different things and get reported differently.
There are so many ideas on building good credit, share some of yours below.
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*Disclaimer – All information in this post is provided as personal opinion. I am not a financial counselor of any kind nor should this information be interpreted as financial counseling. Thank you!