What is Credit?
Credit, and the credit score that goes with it, is a measure of how well you meet your financial obligations. You gain credit by having things like loans and credit cards (which really are a type of loan with a rolling or changing balance), and paying those off as agreed. The longer you have an account that remains in good standing, the better your credit will become over time. Factors that go into your score look at your overall financial health, including your total debt amount related to how much money you make and how much debt you have access to (your credit limit). The amount of time you have had credit and used it wisely, as well as the different types of accounts that you maintain also affect your score. There are some easy ways to build credit, but overall it takes time and careful money management.
Ways to Build Credit With No Credit History
When you are first starting out, it can feel like a catch 22. No one wants to give you credit, because you don’t yet have any. There are some ways around this. One of these is to get a loan, be it for a car or a small personal loan for something else, with someone else that already has established credit as your co-signer. This means that if you were to not make the payments, that person would then be responsible. Usually, it is a parent that will do this for you. Then, make sure to make the payments each and every time, on time. Your credit will slowly improve.
If that is not an option, there are things called secured credit cards which may be available to you. These work by having you actually send the credit card company a certain amount of money which they hold and they issue a credit card with a limit of that same amount, or sometimes slightly higher. Essentially, they have no risk, and you then have a credit card that you can use to make purchases and pay them off, thus building your credit.
Pitfalls of Credit Cards
Beware when opening and using credit cards, as it can be quite easy to lose track of how high their balances get. The interest rate will also probably be extremely high for those just starting out, so if you get behind in your payments or do not pay your balance off each month, your bill could end up getting bigger every month instead of smaller. Many people ruin their credit and get in dire financial straits using credit cards. It is always a good idea to keep close track of your credit card balance, and pay it off every month. If you find you cannot pay it off every month, at least pay more than the minimum payment so the interest doesn’t make your balance skyrocket, and then pay it off as soon as possible.
The thing to remember about credit is that it takes a long time to build it, and a second to ruin it. If, for instance, you did like I did and paid my student loans as agreed for a number of years and then ran into some difficulties and didn’t pay for a little, your credit would go straight down the tubes. The longer the debt isn’t paid, the lower your score goes. If a debt is actually so far behind that it gets sent to a collection agency or goes into default, it will take years and money for your credit to recover.
I will say it again-you want to avoid late payments and missed payments on any of your financial obligations if at all possible. A good idea is if you are having any kind of difficulty paying, you should immediately call the company that has your debt and ask them about what options they have to help. Often, they will offer a temporary waiver or forbearance. They might even cancel some of the debt or drop the interest rate for you. This goes for many types of debt, from credit card companies, to loan companies, and even the Internal Revenue Service for taxes. Communication can go a long way in saving your credit!
It is important to build credit, and to use credit wisely. It can be a double edged sword to have a loan or a credit card, because both charge interest on your purchases. This means you end up paying more for whatever you buy. Credit cards may have a period before interest starts accruing, usually 30 days, but loans usually do not. If you want to minimize the amount of interest you pay, you must pay extra on each payment for loans, and pay off your credit card balance every month.
Remember-it takes a long time to build credit, but only moments to ruin it. Think carefully and use it wisely.
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