There comes a time in everyone’s life when they need to borrow money either to pay for school, a home, or maybe an unexpected bill. For a lender to even consider loaning money to someone they’ll need proof that you’ll pay it back.
All the Proof They Need is Your Excellent Credit Score.
A credit score is a number used by lenders to determine how good you are at paying back debt. Credit scores can range from 300 to 850, with higher numbers representing a better score.
These scores are based on several factors, the most important being your payment history. Credit lenders watch how often you spend money and how often you pay it back on time.
Other factors they consider are how long you’ve had credit, how many credits accounts you have, what your credit limit is, and how much debt you have. Credit card owners should strive to maintain a fairly good score, at least over 660.
Maintaining a good score can save you money in the long run. Companies charge you less when they know you are good at managing your expenses. Working on having good credit can be very beneficial. Most lenders that offer credit cards have some sort of benefit attached to using a card.
The better your score, the more benefits you’ll receive from your lender. Having a good score allows you to pay lower interest rates on loans and credit card purchases. Plus If you decide to rent an apartment or home, you’ll find yourself paying a reduced security deposit or maybe none at all.
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These are just a few examples of how having good credit can benefit you. Ultimately it allows you to save and receive exclusive offers that people with bad credit don’t get. A good score is certainly going to make you stand out for the better.
There are Four Key Ways to Building Credit:
- Low Utilization Rate – to have a low utilization rate your credit usage should be anywhere from 10% to 30%. This means that you should spend no more than 30% of your credit line (with a $1000 credit line the most you should spend is $300)
- Pay It Off in Full – try your best to spend money and put it back within the same month you use it. Maintaining a low utilization rate will help make sure that you don’t spend more than you can afford to pay back.
- Account Age – the moment you receive your card, your credit is born. Having a credit account for a long time can benefit your score. Be wary of opening several new accounts because this lowers your credit age and can affect your score.
- Monitor your credit – it is not uncommon for credit reports to contain an error. This is why you want to make sure you monitor your credit reports for any errors that can damage your score. If you happen to find any errors report it immediately.
Building up an excellent credit score is easy when you think of credit lenders from a business perspective. Allow me to explain… Major financial institutions make money by lending money to customers in the form of credit.
The more someone uses this credit, the higher the interest rates they pay. Interest rates force one to pay back more than one originally borrowed. The extra money made off interest rates goes straight to the lenders. This is how they make their money (note: they make money several ways, but interest brings in the most revenue.)
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So now that you know this how does it help you build credit? Taking into consideration that lenders want you to spend more, think about what will happen when you do the opposite. If you start to use less of the money they give you, they fail to make money off you. As a business, lenders want to make the most they can off a customer. When you decide to not pay them a lot it results in them trying to entice you to spend more by offering incentives.
These incentives can be credit line increases, low-interest rates, points, etc. If you continue to keep up good credit behavior even once all these incentives are received, you’ll be rewarded. Not because they want you to spend more, but due to the fact that they want to keep you as a customer.
Losing you means losing money regardless of how much it is. They’ll rather keep you as a long-term customer than have you change credit providers. It’s possible that one day you may spend a lot, so they’re going to make sure that it’s with their money.
At the end of the day, these are all tests. Once you pass their test, they reward you. Those who fail end up falling for their trick often finding themselves subject to higher interest rates. It pays to be on the good side of the credit lenders.
Ways to Secure Credit Cards
There are two types of credit cards, secured & unsecured. A secured card is similar to a prepaid card. You open an account with a credit card company but instead of them giving you a credit line, you have to put in a cash deposit. Essentially you are providing yourself with your own credit line from your cash deposit.
Secured cards are typically used to build credit for people with terrible or no existing credit history. Lenders provide this card type to determine the risk associated with lending you money. If you struggle to make payments, they will take the money from your original deposit, thus letting them avoid the risk of losing money. After you can demonstrate responsibility with good payment history, they will raise your credit line and return your initial deposit.
Unsecured cards are for those with decent existing credit history. Unlike secured cards, they don’t require a cash deposit, and they usually have a higher credit line. With an unsecured card, you can receive the perks and rewards that each credit lender has to offer.
There are a lot more options when it comes to unsecured cards. One should pick a card that offers them the best benefits and rewards that fit their lifestyle.
Understand that building credit is not an overnight process. It takes months, sometimes even years, before you can establish good credit. It’s best to get started as soon as possible.