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A Guide to Establishing Stellar Credit

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Credit is an extremely important thing for a financially mature adult to have. It allows you to get loans for homes and cars and rent apartments. Bad credit can increase the amount of interest you pay. People who have no credit or bad credit may struggle to get their credit to be pristine, but this guide can help make their credit score skyrocket.

Establishing Stellar Credit

[Read: 7 ways to create and improve personal credit score]

Check your Credit

Even if somebody has never used a credit card in your life, credit bureaus may have information that they have used to create a credit score. If they have had a credit card, they certainly do. There are free credit report services that can give a person their credit score. In America, there are three free credit-reporting services, so people can check their credit report three times a year by cycling between them. These services may also offer more frequent credit reports for a fee. You may find that you have a purchase that is misfiled under your name or a lingering piece of debt you forgot about. Make a habit to check your credit score regularly. In the modern financial word, the credit score forms a ladder to great purchases.

Choose Cards Carefully

Different credit cards have different options, and while signing up for the first one you see may look appealing, it may not be the best for the long term. Do some heavy-duty comparisons between choosing a card. Figure out what kind of benefits you want from your card. Some allow cardholders to earn travel rewards points, while others have no annual fee. If a person is getting their first card and establishing stellar credit, they should consider getting something with a low maximum credit so they don’t accidentally spend a lot of money at once. Be sure to read the fine print. A card that starts out with a 1% interest rate for the first six months might jump up to 12% once the grace period is over.

Work up Slowly

Getting a credit card can be difficult if you have bad credit. In that case, a secured credit card may be the best option. Secured credit cards help to establish stellar credit by having cardholders make a cash deposit before you use the card. They still have to pay every month, but they have a cushion in case they cannot pay. Another option to get a better credit score is to take out a small loan with a credit bureau and pay it back as soon as you can. The loan can be as small as $100.

Pay on Time

Always make sure the bills get paid on time. Credit reporting companies track the bills that are in your name, and if they see you are falling behind, they will count that against you. If you want to establish stellar credit, paying your bills is a good way to do that. It shows that you are a dependable, reliable person. Late payments will accrue interest, meaning you will pay more if you do not pay right away. In the digital age, there are more ways to remind yourself to pay your bills than ever before, and it’s good for your wallet and your credit score.

Mind Your Balance

Paying your creditor back is more difficult if you have a high balance. Moderate your credit card usage so you keep your balance low and pay less at the end of the month. If you have interest, know that the money you send will go to the interest before it goes to the original payment.

Keeping an eye on your balance will also inform you if somebody is using your credit card without your permission. That someone could be a scammer who stole your information or a ten year old who entered your credit card randomly when making an online purchase. Someone other than you making purchases on your account can destroy your credit score. If you find a purchase you did not make, contact your credit card provider right away. They have people that can help you resolve the issue.

[Read: Saying Goodbye To Old Credit Lines]

Focus

Establishing stellar credit takes a long time. There are times when you may be tired, upset, or stressed and want a simple solution. You could just give in and use your credit card rashly just one time. Resist that urge. The thrill you get from buying something you can’t actually pay for will crash down hard when you get the bill. One bad purchase could start an avalanche of problematic purchases that drags your credit score down. If you keep focused on the things you will be able to do once you have a good credit rating, you can overcome all of those tempting purchases. When you need that credit, you will thank yourself for being so diligent.

Your Credit Score Number

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We are always hearing about our credit score, it is this it is that, it is high, or to low. It is a real important number to know, and knowing it is half the battle, if you know how it is calculated, you can actively take part in how your score can grow for the better. Your credit score is used in many instances, most commonly is in borrowing money or getting a loan, but did you know that employers will look at it when deciding on hiring someone, or that land lords look at in in rental situations or even in insurance rate quotes.

Your Credit Score

[Read: How Can a Person Reach an 800+ Credit Score?]

Factors to Consider With Your Credit Score

  • Know Your Score
  • Know Where to Find Your Score
  • Know How it is Calculated
  • Know How to Raise It

You should know where to locate your score, and the three places are Experian, TransUnion and Equifax, you should pull each of these reports every year. You are entitled to one free credit report from each bureau each year. The most important factor is to know how your score is calculated, and lastly how to raise that score from where it is now.

Payment History

It may seem obvious, but it is often the most misunderstood factor. Accounting for 35% of your score, is this history of what and when you have made your payments. It is a great indicator of how you will pay any new bill, the history of the old bills, and this is why it carries such a great weight. It includes the obvious, the house and the car, but can include the utilities and cell phone bills, and even these days medical bills. So make sure, even if you are making a minimum payment, to pay it on time before the due date.

Debt You Owe

Debt you owe in comparison to the amount you can borrow accounts for another 30% of your score, so if you are “maxed out” on your revolving accounts or credit lines this will impact your score quite a bit, to the tune of 1/3rd of your calculation. This would be a great place to improve your credit score by implementing a pay down of your debt strategy. Paying down your debt, and paying it one time account for 65% of your score, so you can actually kill two birds with one stone so to speak, pay a little more on each bill, and pay it on time and you can see your score improve quickly.

Credit History

A person does not start out with a perfect credit score, and go down from there, unfortunately that is not how it works, look at number one and two above, but if you begin early enough and establish yourself with some debt, you can quickly improve your score over time. In fact, to the contrary, you start out with no score according to savvyoncredit.com you have to build it and make it grow positively. This is about 15% of your score.

New Credit

Having to much new credit is not good either, amounting to much open accounts could signal that you are short on cash, or in a bad situation financially. But what is to much, that is left to interpretation, because just because you have open lines does not necessarily mean you are in financial trouble, it could be that you have a lot of extra income and that you are getting more credit, this may be why this only amounts to about 10% of your score.

Having Mixed Type of Debt

Lets say, all your credit is on revolving cards, and no house or car, or other forms of credit, this could be a red flag, as it may indicate that you are using cards to sustain yourself, but with a healthy mix it can show a variety of monthly payments to different sources. This accounts for 10% of your credit score.

[Read: 7 ways to create and improve personal credit score]

Make the Right Choices

As you can see, there are many complex factors that go into a credit score, and they are arguably this order of importance; payment history, how much you owe, your overall credit history, new credit and having a good mix of debt, these comprise of your credit score in a whole, if taken into consideration while you are addressing your accounts and your amount of debt they can assist you when analyzing your debt and credit picture, and where you would need to focus on when deciding to correct your score. Keep in mind, that whatever you choose that you make your payments on time, because regardless of your other intentions, the monthly payments will come due, and your ability to pay is one of the largest portions of the score, making them on time, you can then focus on the rest as your situation unfolds.