Hi! Welcome back to the All About Credit Series. Last week we covered the basics of credit and today we are covering the next level, which is building and maintaining credit. This is the most crucial level because it is at this point where it will make or break you. If you build and maintain your credit consistently, you will not have to play the “Fix It” game. It takes less time to build your credit than it does to repair it. Lets discuss how!
How do I build credit?
There are many different options to building credit. I’ll share a few with you but its up to you to research and choose the option which best suits your specific financial situation. If you’re a parent looking to jump start your child’s credit, you can add your child as an authorized user to your account. However, you need to realize that this means linking your credit history with that of your child’s, do so wisely.
When it comes to helping your child establish a credit score, the authorized user approach has some advantages. That’s because the authorized user usually gets credit for the entire payment history on that card. Thus, if you had this card for five years and paid your bills religiously, your child will piggyback on your good payment history, getting credit for more years of money management than really apply (cbsnews).”
If you have student loans, these will help to establish credit. Just make sure that if the loans are in repayment that you are making your payments regularly and on time. Student loans indicate that you are investing in your future and are often seen as “good credit.” It should be noted that student loans are treated as installment loans. This means that you borrowed a certain amount for a specific event (ex: to fund education or purchase a home), which is to be paid back with scheduled, periodic payments. Revolving credit on the other hand can be used more freely and as you pay it back, the funds become available for you to use again.
Revolving credit requires more control on your part; therefore the impact to your credit is greater. With that being said, having a credit card helps you to maintain credit. If used wisely, it will also help you to maintain good credit as well. Remember, credit is not free money it must be paid back. Do not spend more than you can afford to pay back.
“Credit is not free money it must be paid back.”
How do I maintain my credit?
Essentially, having good money habits is key to getting and keeping a good credit score and positive credit report. Regardless of the type of credit accounts you have, maintaining your specific mix of credit requires the same actions on your part:
- Pay ALL of your credit accounts on time
- Consider paying credit card accounts off in full
- Rule of thumb: refrain from using more than 30% of your available credit
- Avoid applying for multiple credit accounts within the same time span
Most importantly, check your credit report annually for any discrepancies and check your credit score periodically to ensure that you stay on track. The major thing that blindside people is that they forget that credit accounts are not the only accounts that report to the major bureaus. Utility companies, medical facilities, landlords, etc. have the ability to report non-payment on your behalf. Create a budget and stay on top of due dates, if not, your credit will be negatively impacted.
Is there a thing as too much credit?
Although there is no requirement as to how much credit you can have, you have to maintain a good mix for your personal financial situation. If you can’t afford to pay rent, have two credit cards, and pay your cell phone bill, then something has to go. Having multiple open accounts doesn’t hurt but how you use those accounts does. A few tips to follow are
- Do not apply for multiple accounts at the same time
- Refrain from utilizing the open credit on all your accounts within the same time span. Over using your credit on multiple accounts will lead to a lower score.
- If you have multiple accounts open, PAY ON TIME!
What negatively affects my credit?
If it hasn’t been made clear yet, non-payment and late payments significantly affect your credit. If that isn’t clear, let me be more specific; according to Equifax, the most common negative score reasons are:
- Serious delinquency
- Serious delinquency, and public record or collection field
- Time since delinquency is too recent or unknown
- Level of delinquency on accounts is too high
- Number of accounts with delinquency is too high
- Amount owed too high on accounts
- Ratio of balances to credit limits on revolving accounts is too high
- Length of time accounts has been established is too short
- Too many accounts with balances
RELATED: How To Repair Your Credit
Should I carry a balance?
Carrying a balance will not increase your score. However, carrying a balance close to the credit limit or over the limit will hurt you. Some options to choose from are:
- Choose a bill (ex: phone, light, or gas) that you will pay with your card and then pay it off every month.
- Pay as you go: immediately pay what you spend
- Pay the minimum: keep a balance below 30% of your credit limit and pay the minimum payment monthly.
Will cosigning affect my credit?
Cosigning an account makes you just as liable as the primary account holder. Should the account holder default on their payments, it will be your responsibility to pick up the slack. If you are unable to, the account holders credit will be affected and so will yours. This is a decision that should be made with much thought. Cosigning: Is It a “Death” Sentence? goes into detail on just how serious cosigning an account is and some things to consider before doing so.
If I close a card or account will it affect my credit?
One of the most important components of your credit report and score is payment history. The older your account, the longer your history. If this particular account you are thinking about closing is one of your oldest accounts, I advise you not to close it. If this account is your only source of credit or you have an outstanding balance, these are also reasons not to close. Closing an account is an extreme measure. Responsibly utilizing credit will prevent you from getting to the point of having to take extreme measures.