Updated: Apr 24, 2021
It's no secret that credit can have a serious affect on your financial future. But are you wondering how to get the score you want? We want to help!
What age do you think you or your children will need credit at? Do you think a car at 16 is a good reason to use credit? Maybe you want to buy a car with cash or only use a bike, so this might not apply to you. But do you want a house, or to be approved for renting nice apartments? If you do, a good credit score will open up a whole new world to you!
If you want the best chances at having an ideal credit score when the time comes, you need to plan 7 YEARS in advance. Yes, you read that correctly. 7 years or more is the optimal amount of time to have credit history before you actually need it. Why?
Your credit history stays on file for 7 years with the credit bureaus. They want to see consistency of on time payments and well-managed credit line usage. We'll speak more to percentages of credit availability to use coming up. Many people see "age of revolving credit is too low" as a reason for their scores not being ideal. Good news! There's an easy fix... time.
Now unfortunately, we don't get to go back in time. But we have the option to plan ahead! A huge part of why Skip Class was created was to help families plan ahead. How far ahead should you or your children try to plan ahead?
So what does that mean for you and your family? Do you want your child (or you) to be able to obtain a small loan on a nice reliable vehicle at 16? Start their credit history by the age of 9! Want to be able to buy a house at 25 with great credit? Start establishing good credit by 18! Don't panic, you can start later than that. Any good payment history is better than none. The biggest takeaway here... Plan ahead!
What should you do for the 7 years?
If you're lucky enough to start early, consider a route like this.
Having a bank account is a great start! It doesn't necessarily affect your credit score, but a bank account makes facilitating payments much easier! Most banks offer simple-to-use online account management, and most credit card companies accept online payments. It's very easy to track and analyze your spending using widely available software offered by most banking institutions. Open a bank account as great start to building credit.
Next, consider adding the individual trying to build credit as an "Authorized User" on an existing credit card account. Your name can be added as an authorized user on your parent's or relative's card. If you don't want the accountability of having to make sure you make on time payments, don't even use it! Just having your name as an authorized user on a credit account that's being paid by a responsible person will help grow your credit! The age as which you can be added as an authorized user varies by company. Check this chart below for reference!
If you're 18 already and struggling to get a credit card, try a Secured Credit Card. You have a high chance of being approved as long as you don't have a history of bad credit such as: missed payments, late payments, bankruptcies, etc. If you're thinking you have a history of that already, you might consider a secured credit card that doesn't have a background check. These cards are not ideal because a yearly fee usually accompanies them, but they are an option if you're stuck.
So you've opened a bank account and obtained a credit card either by:
Being an "Authorized User"
Applying for a secured credit card
Applying for a regular credit card
What steps can you take to maximize your credit building power while using the credit card?
First, make your payments on time. Even better, pay off the card right after each time you use it! This way prevents you from going a whole month and building up a bill accidently that might be unmanageable.
Don't wait past the due date to pay, ever! It's a missed payment on your credit history, and WILL hurt your score. We urge you to pay your card off every month, on time or even better, early! If you only pay the minimum, or pay late, you'll incur interest charges. The average interest rate for credit cards at the time of writing is over 16% according to creditcards.com. This means if you spend $1000 on your card and miss your payment, you'll owe an additional $160 on top of the $1000 you owed. Now you would owe $1160... Ouch!
Don't use your entire credit line (also referred to as credit limit)! It's widely accepted that under 10% of your credit line is the ideal amount to use to build credit. What does this mean? First, let's dive into what your "available credit line" is. Let's say you've applied for a new card and you're approved. The credit card company will only allow you to spend a certain amount of money on that card. The reason is two-fold. First, it limits the liability of the credit card company in case you don't pay them back. Second, it saves you from spending too much money in getting yourself into a bad situation financially. You can never spend more money on the card than the credit line allows. For example, when you get a new card, you might have a $1000 credit line. This means theoretically, you could use $1000 from the credit card company. But should you? Of course not! Using 10% or less will build your credit much faster! And, using under 10% will keep you in a much safer financial position for repayment. This means (in our invented scenario of a $1000 limit) using somewhere around or under $100, and paying it back early or on-time! Information from FICO states that majority of people with scores of 800 or higher use just 7%. Experian states that using less than 30% is okay. Stick to the lower percentage, it won't hurt you! Further more, FICO states that your credit utilization can affect 30% of your score! That's just ONE part of the criteria that contributes to your credit score, and it has a VERY SIGNIFICANT impact on your score!
A Couple of Common Tricks: Afraid your spending might get out of control? There are a couple of useful trips to managing your credit safely and effectively. Most of us have monthly payments for things like streaming services or memberships. Do they add up to close to your ideal credit usage? If they do, you could use the card to set up automatic payments, and pay a known, consistent amount every month and build your credit in the process! This is extremely helpful because you can leave your card at home, where you're not tempted to spend money on it while you're out! Another common way to safely use your card is to use it just for buying gas or groceries. I can't tell you which way works best for you, but some of us have put post-it notes on our cards to remind us to only use it for one thing! Do whatever it takes to keep you focused and disciplined with your credit card spending.
Okay, I am building my credit as quickly as possible using a credit card, what other options do I have?
The next option you might consider is a loan. Personal loans and Secured loans both typically have higher rates than vehicle loans. This might not seem like an ideal situation, but it could still be a great option for building credit. For example, if you borrowed $2000 on a personal loan at a rate of 8% for 3 years, the total amount of interest you pay would be $256 with no extra payment. That's only $85.33 per year in interest, or $7.11 per month to help build your credit! Are you worried about self discipline? You can take the money from the loan and deposit it into a bank account at the same bank you receive the loan from. Set up the loan to take direct withdrawals out of that account to pay for itself. All you have to do is ensure that you add an extra $256 to that account (in this scenario) before the account runs out of money from paying the loan.
The difference between a "Secured Loan" and an "Unsecured Loan" is collateral. A Secured loan will be backed by either an asset or bank account that you already have. An Unsecured Loan will be back only by your credit score and credit worthiness. In most cases, an Unsecured Loan will have a higher rate because of the additional risk taken on by the lender. Their additional risk is assumed by the lack of collateral in the event that the borrower cannot repay the loan. Additionally, secured loans would be easier for an individual with bad credit to obtain.
Are you still struggling to get a loan even with these options? Consider using a "Cosigner". A Cosigner should be a responsible person with good credit. A cosigner is responsible to pay the loan if the borrower fails to make the payments. Banks will often give a loan to individuals without a strong credit history if they have a cosigner with a solid credit history. For a bank, the cosigner is added insurance that the money will be repaid. If you have someone in your life willing to cosign for you, DON'T take it lightly! They're trusting you enough to make the payments on time and fully repay the loan. This is a big risk for them!
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