Building and Keeping Good Credit

By: Jerry Clifford

All homeowners have at least one thing in common, besides being responsible for all their home's repairs. They all had to build good credit in order to get a mortgage.

A good credit score means that you have shown that you can pay back borrowed money on the terms laid out by the loan. Bad credit means you have missed payments, or owe more than ten percent of your credit balance. If you have never had a loan or used a credit card, your credit record is clear. If you want a mortgage, or a loan for any other large purchase, you will need to start small and prove that you are capable of repaying loaned money.

One of the first steps to getting good credit standing is to have active checking and savings accounts. While most people do have bank accounts, there is the rare exception. But you won't begin to build credit without at least one bank account.

The next step would be to obtain a credit card. Many lending companies do not want to give a credit card to someone who has no credit established yet, but some will. Shop around. Consider a department store or gas station credit account. These are a great way to start small.

If you have had a student loan, it is imperative that you make your monthly payments once you have finished school, or promptly apply for any type of payment relief program if you are eligible. Too many people just ignore their bills if they can't afford them, and this is the worst thing you can do to your credit score.

Once you have a credit card of some kind, the key to building good credit is to pay your bills on time. However, making your minimum monthly payment isn't always enough, especially if you are continuing to use the card. Try to keep your balance at no more than ten percent of the total credit amount that you are eligible for (that is, the maximum amount the company will loan you). Also, try not to use more than thirty percent of your credit maximum. For example, if your card's maximum is $10,000, don't use more than $3,000, and if you do, be sure to pay back $2,000 of it as soon as possible, ideally when your next bill comes. If you are continuously maxing out your card, and only paying back a fraction, it shows the company that you have irresponsible spending habits. Sure, they make plenty of money off of the interest you incur, but your credit score goes way down.

If you make late payments, it goes on your credit score, and can take up to seven years to be removed. So even if you can't pay back the amount that would keep your balance below ten percent, at least pay them the minimum amount that is stated on your bill.

Ideally, you will have a credit card that you use only for your regular purchases, with a goal of building good credit. This would mean you pay for groceries and utility bills on your credit card, then pay it all off each month. As soon as you begin to use a card for extra purchases that are above and beyond your monthly income, you begin a negative credit spiral. However, it is possible to get out of it fairly easily if you keep the amount small, but diligence will be needed. Also, keep in mind that the longer a balance sits on your card, the more you end up paying in the long run.

If you are having trouble obtaining any sort of credit card, see if a family member is willing to add your name to their credit account. Spouses frequently have joint credit cards, and if one of them has a good credit score, and the other has neutral credit, one benefits from the other's standing. Similarly, if you can't get a loan, including a mortgage, many lending institutions will consider you if you can get a co-signer, that is, someone with a better credit score than you who agrees to take responsibility should you default on your payments. But whatever you do, don't let this happen, or you'll be dragging down someone you care about's financial standing along with yours.

Credit Matters
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