Anyone who has ever tried to take out a loan, open a bank account or apply for a line of credit knows the weight that a high credit score holds in the business world. Building, maintaining and preserving a great credit score is crucial when it comes to being able to access many much needed goods and services. Having a low credit score can severely limit your ability to do many things, such as open a free checking account, take out a loan for a home or car or even obtain a non-secured credit card with which you can rebuild your credit score. Building a good credit score and rebuilding a negative one both require a thorough understanding of the way credit works, something that many people who find themselves with credit problems may never have learned. If you want to build a great credit score, maintain the high credit score you have or rebuild your poor credit to make your life easier, read on to learn about how credit works, is maintained and can be rebuilt.
How Does Credit Work?
One major aspect of credit that many people fail to understand is that when a person turns 18 and becomes a legal adult who is able to apply for a line of credit without a cosigner, they do not actually have a credit record to speak of. Someone who has no credit history does not automatically have a high credit score- in fact, they have a neutral credit score, which can make obtaining credit and loans almost as difficult as having a poor credit score. A credit score is something that has to be earned and built with responsible financial behavior. It is a number that indicates the level of financial risk a company would be taking by loaning you money or opening an account in your name. For this reason, it is prudent for young people who are just entering adulthood to begin building a credit score through financially responsible behavior.
How Can Someone With No Credit History Build A Credit Score?
If you are a young person who has no credit history and has been denied loans or lines of credit because of this lack of history, a great step to take is to open a small line of credit with a company that facilitates credit for students and young people. Talk to a parent or someone else with a good credit score and an understanding of financial responsibility in order to find help choosing a credit card which has a low APR- this stands for annual percentage rate, and it indicates how much interest you will have to pay on purchases you make with your credit card. Many companies offer small lines of credit to college students and young people to allow them to build the credit history that they need to accomplish many practical tasks.
When you have chosen a card, applied and been approved, your credit card will arrive in the mail in a few weeks. Enclosed with your credit card will be a number of different kinds of information, including the terms and conditions of your line of credit, the amount of money that can be spent using the credit card, also known as your credit limit and information about card safety and security as well as a lost card policy. Keep this information in a safe place.
With a credit card in your hand, it can be very tempting to think of the purchasing ability the card gives you as free money or a way to access things you would not otherwise be able to afford. This is a line of thinking that you must stop immediately if you want the credit card to work for you and not against you. Instead, use your credit card to buy things for which you would normally pay cash and then pay the balance in full with every monthly statement. The main rule of thumb is this- do not buy things with your credit card that you could not afford to purchase with your own cash money. By avoiding excessive purchases and not living beyond your means, you will gradually start building a very good credit score. As your credit score improves, your credit limit will likely be extended and your APR will likely be reduced. By staying with the same company that gave you the card in the first place, you will reap the benefits of company loyalty in years to come.
How Do I Maintain My Good Credit Score?
If you are someone who has a great credit score already, chances are good that you know you did not come by that credit score out of luck. You have made financially responsible decisions, paid your bills on time, paid back lines of credit and have kept yourself out of serious debt. These are all key factors in maintaining a great credit score. However, when you have a high credit score, many credit and loan companies will prey on you, offering you large amounts of money and lines of credit with very high limits. Even for a financially responsible person, these offers can be tempting. However, living outside your means is not an option for anyone who wants to build, fix or maintain their credit score.
In order to maintain your high credit score, you must be willing to continue being financially responsible, paying bills on time and not going into debt. If you choose to take on a card with a high credit limit, continue to use it only for things that you will be able to pay off immediately or quickly. It is pertinent to note that cards like these can come in handy in the case of an emergency where funds are not readily available, which is an upside to having a large line of credit available. Even in these cases, it is important to make sure that the card gets paid off as quickly as possible to avoid lowering your credit score.
How Can I Fix My Low Credit Score And Increase My Financial Options?
If you are someone who has dealt with the many pitfalls of having a low credit score, you are probably more than ready to fix the problem and get on with your life. Many things can lead to a low credit score. Financial irresponsibility, high balances on credit cards, unpaid bills of any type, overdrawn bank accounts and living beyond your means can create a situation where your credit score is too low to be able to do many basic things. This may leave you feeling like you are unable to advance in life, an extremely frustrating feeling. Sometimes, a low credit score happens through no fault of your own. Losing employment for personal or medical reasons can create a massive financial deficit which leads to a plummeting credit score and debt that is hard to recover from. Regardless of why your credit score is low, the important thing to remember is that there is, in fact, help. You can repair your credit score and expand your options.
In order to rebuild your credit, consider the use of a secured credit card. While you likely will not qualify for a standard line of credit, a secured credit card requires you to pay a sum for your card which is basically insurance against your low credit score. Although this may seem counter-intuitive, a secured credit card will allow you to build your credit in the same way that someone starting fresh would. Purchase only what you could afford to buy in cash and pay your statements in full to gradually improve your credit score.
If you already have a number of credit cards with high balances, begin to devote money to paying them off. Having a credit card that is close to or at its limit causes a decline in your credit score, so paying off your cards is a major step in repairing damaged credit. Making payments each month may require sacrifices, but it is worth it. If you feel this is impossible to do with your income, consider going through a reputable debt consolidation company that can have your various debts combined into one monthly payment that is affordable to you. Although this method works more slowly, it will gradually improve your credit score.
Another key strategy to rebuilding your credit is to be consistently aware of your credit report. Every consumer is entitled to a free credit report from the three major credit bureaus once a year. Take advantage of this to see any negative marks on your credit report. If any of them are in error, dispute them and have them removed from your report to raise your score. You may also find debt you didn't know or had forgotten that you had. In this case, make arrangements with the company or collection agency to pay the bill and get the black mark off of your credit report. Making corrections and eliminating old debt can significantly raise your credit score.