Understanding Credit Scores
Before we get into building credit strategies, it’s useful to know what a credit score is and how it is calculated. Credit scores range from 300 to 850, with higher scores representing better creditworthiness. The items that affect your credit score are:
* PAYMENT HISTORY (35%): Making payments on loans and credit cards on time has the biggest impact on your score.
* CREDIT UTILIZATION (30%): This ratio compares the current credit card balances you have with your total available credit. It’s advised to keep utilization under 30%.
* LENGTH OF CREDIT HISTORY (15%): Having a longer credit history will have a positive impact on your score, which reflects experience managing credit.
* TYPES OF CREDIT (10%): Having a variety of credit accounts, such as installment loans and revolving accounts, can positively influence your score.
* NEW CREDIT INQUIRIES (10%): Once a new credit account is determined, the application can produce a hard inquiry, which can give your score a temporary dip.
Understanding Credit Scores
* ESTABLISHING CREDIT: If you’re new to credit, consider opening a secured credit card or becoming an authorized user on a family member’s account. Secured cards require a cash deposit that acts as your credit limit, making them a safer option for newcomers.
* PAY ON TIME: Always pay your bills on time. It is critical to maintain a positive payment history, so setting up automatic payments or reminders can help you stay on track.
* KEEP BALANCES LOW: Try to keep your credit utilization under 30%. Ideally, repay your balances in full every month so you won’t incur interest charges and it will help your utilization ratio.
* CREDIT REPORT: Make Sure There are No Errors or Inaccuracies. You have the right to one copy of your report each year from each of the three major credit bureaus—Equifax, Experian, and TransUnion.
* LIMIT NEW APPLICATIONS: It’s essential to build credit; however, don’t apply for multiple accounts at the same time. Many hard inquiries will ding your score in the short term and could indicate to lenders that you might be a riskier borrower adding you to the subprime pile.
Responsible credit building is an important piece to a long term financial strategy. The credit scoring system considers various factors, including payment history, credit utilization, and the length of your credit history, among others, so consistently following best practices such as paying bills on time, maintaining low credit utilization, and monitoring your credit report can help you build a solid credit profile over time. Also keep in mind that establishing credit takes time and effort. While this can be an obstacle, with the right approach, you can make use of these benefits which may lead you to financial freedom.