August 25, 2020)--Knowing and understanding your credit score allows you to better manage your finances. Some people think they can avoid credit altogether, however, there will certainly come a time when you will need to use it. If you haven’t prepared in advance, you will be in a difficult position. Fortunately, by being responsible with your spending, anyone can build a solid credit history.
Why It’s Important
Your credit is used for many things. It is easy to think that you don’t need to worry about it if you aren’t planning to buy a house or car soon. Many utilities will run a check to determine if you need to pay a deposit, and car insurance companies give more competitive rates to those drivers with a better score. If you are headed to college soon, private student loans require a good score. If you do not have adequate credit, you will need to have a cosigner for these loans. Many people are uncomfortable with this and would like to take out student loans without a cosigner. Having a good score allows you to do so.
How to Build
The most important rule is to pay everything on time, always. Late payments are devastating to your score. Get in the habit of sitting down regularly and paying your bills, or setting them up so they are on automatic payments. Once you are comfortable that you have your existing finances under control, you can begin to build. Applying for a credit card is the easiest way to do this. If you have no or poor history, it can be hard to find a card that you are qualified for. A secured card, where you make a deposit that secures your card, is a good choice. If you are a student, student cards are often easier to get than traditional cards.
Resist the urge to overspend. One good plan is to set up a small payment or bill to be automatically paid monthly, and then pay your card off in full. You do want to use the card so that you will build your history of reliable payment, but you don’t want to overspend. If you spend more than 30 percent of the available credit, you are considered to have high utilization, which lowers your score.
Time Has an Impact
It can be frustrating to know that you are paying your bills on time and acting responsibly and not see any changes. Building takes time, but you will begin to see results. It is important to note that the negative effects of a late or non-payment will result in negative marks much more quickly than the results you see from positive behavior. After a few months of responsible behavior, you may want to consider applying for another card. Having more than one line of credit will raise your score. Of course, if you are planning to take out a loan, to buy a car or pay for school, hold off on that. These loans will have a beneficial effect on your score as well.