The financial highway to a getting low interest on your mortgage or lower insurance rates ironically begins with building a good credit history. In this country, the rate you will pay on your mortgage or auto loan really depends on your credit score. Some employers even check your credit score before they hire you! In some industries like the insurance industry, you can never be an agent if your credit score is below a certain level. So how does one begin to build a credit history. [Basics of Credit Score and Credit Report and How often to Check]
The ironic thing is that to build a credit history, you need to get credit! That credit can be anything, be it a mortgage, an auto loan, a credit card, an unsecured personal bank loan. Yes, you can get an auto loan or even a mortgage without a credit history. Your files will be reviewed manually and you have to produce bank statements and your W2. Same goes for unsecured personal bank loan. But the problem is that if you have no credit history or track record, then your rate will be higher than someone with a pristine credit score.
Hence, the cheapest way to build a credit history is ironically a credit card. You may be charged an interest rate if you carry a balance, but you do not have to carry one! The best time to actually get on is in college (I know I’m playing with fire here but hear my out). The reason is that credit card issuers love to offer cards to students in the hope of keeping them as life long customers. So they offer cards with no annual fees. In fact, being in college is probably the only time when you can get a credit card with no annual fee even if you do not have a credit history. And BTW – every major credit card issuer have student credit cards in their line up. Most major colleges also have their own credit cards which they have partnered up with one of the major issuers.
If you missed the boat in college, then there are other credit cards for people with no credit history. The easiest to get is probably a secured credit card. With a secured credit card, you have to put a deposit with the credit card issuer (which pays interest BTW). The amount of deposit becomes your credit limit and acts as a collateral in case you default. After a year of paying your bills on time, you are likely to start getting offers for regular credit cards with no annual fee.
Composition of your FICO score
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Aside from getting your credit card, loan, or whatever may be, it is important to understand how FICO computes your credit score so you will do the correct things to build your credit score.
There are several simple ways to raise your FICO score:
Pay all of your bills on time, every time. – This includes everything – your utility bills, mortgage and auto payments, and all of your credit cards.
Check your credit report at least once a year – – By federal mandate, each of us are allowed one free credit report from the credit bureaus. You can get them at www.annualreport.com. If there are any errors, you can get them removed. [You can use Equifax FREE 30 day trial which includes your FICO score or check out the products at MyFico including FREE Trials.]
Do not charge more than 30% of the available balance on any of your credit cards. – Lenders do not like to see that close to maxing out on your credit limits. Make sure you stay within the 30% zone and you should be OK. If you are way over, then make every effort to reduce them. In fact, I suggest you pay in full every month!
Do use your credit cards – – Many folks who have got into trouble want to have nothing to do with their credit cards. But simply using them and paying off your bills on time will help you with your credit score. Just putting your utilities on the card and paying them each month will do.
Keep your accounts open as long as possible – – The length of your credit history is another important component in your credit score. If you have credit cards that you do not use, do not close them. Instead, use them once in a while just to keep the card active.
It will take time – – If you are starting from scratch, then it will probably take a year to 18 months for you to get a decent score. So keep working at it because it will have a significant impact on your future loan rates and even insurance rates.
Additional Tips
Here are a couple of other additional tips for managing credit card debt.
Set up Autopay – The best way to avoid late fees is to set up autopay feature where your bank will automatically pay your credit card bills. This will ensure you will never be late on your bills.
Budget – Many folks who got into trouble with credit cards never ever budgeted for their purchases and hence overshoot and get crazy on their credit cards. The best way to combat is to actually have a budget and stick to it. Get into debt and you will end up having to make decisions like should you invest or pay off your debt!.
To conclude, the financial highway to great rates in the feature is to have a good credit score. Other things like your income is important as well. But having a good credit score is a great foundation to have whether you are looking for a mortgage, seeking employment, or shopping for insurance.
This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card has a credit card review site where he reviews lots of credit cards. Today, he is going to write about how to build a “financial highway to a good credit score”. If you are looking to apply for a credit card, check out his compilation of the best credit card deals and offers on his site.
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{ 4 comments… read them below or add one }
Debt sucks, It is somewhat possible to survive without a credit history. I got my first car without a credit history, I paid cash. The biggest sticking point would be a mortgage. Don’t assume you have to vet a credit card to build credit. I got a car loan without having a credit history.
All tips that I will take into consideration. I recently got duped into saying “Yes, I give permission” to an MBNA rep. I don’t want the credit card – but after calling them immediately right afterwards to tell them that I don’t really want another card, they said, “sorry, we already processed it”
I heard from the rep that I spoke to the 2nd time around that if I cancel right away, it will be a negative impact on my card – but by how much?
@ Kyle
Yes, you are right in that it is certainly possible to “survive without a credit history” and it is not unforeseeable that you were able to get a car loan with credit history.
However, you likely received a much higher interest rate and ended up paying much much more in interest charges over the life of the loan then if you had an established credit history and a good credit score.
Using credit cards responsibly is a great way to increase ones credit score and then in turn not only qualify for a loan but also pay much much less in interest charges over the life of a loan (i.e. we are talking tens of thousands of dollars less over the life of a mortgage).
I was just thinking about my credit score today. My employer, a large defense contractor, sends me overseas for 4 – 5 months out of the year and my expenses are near nonexistent while deployed. During my last deployment one of my two credit cards was canceled from lack of use over the years leaving me with my 12 year old Discover card and a bank debit Visa card. My Fico score dropped from 760 to 720, somewhat upsetting since I plan to purchase a home soon and want that best rate as outlined in the article.
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