Building Credit

Credit is essentially a measure of your financial history and it assesses your ability to pay back loans. All companies, corporations, individuals, your next door neighbour and even your grandmother have credit. The strength of your credit history will determine if you are eligible for car loans, mortgages or education loans. It will also determine your rate of interest on these loans. To ensure you will be able to borrow at a low interest rate for life’s major purchases, you must build a strong credit. Here’s how…

Top 5 Ways to Build Credit

1. Check Your Credit Report

Credit Reports are maintained by three major agencies: Equifax, Experian and TransUnion. If you are opening a credit report for the first time, you shouldn’t have history with these agencies. If you do, you might have been victim of identity theft and should consult with Credit Agencies to get the history cleared, as the offenders may have racked up a large debt. Most likely, you will consult a loan officer at your bank about the terms of the loan. It is important to fully understand your agreement in order to prevent mistakes in payment. Late loan payments are on record for seven years and a bankruptcy, 10 years. That being said, credit bureaus have made mistakes before, so it is important to check your credit report for discrepancies. Staying on top of payments and understanding your agreement will ensure a strong credit history.

2. Open a Bank Account

A savings or checking account is another way to prove financial responsibility without starting a line of credit. This is an excellent option for young adults who have yet to apply for a loan. Savings and checking accounts won’t show up in your credit history but lenders will ask to see experience managing money before issuing any loans. There are a number of banks who provide free checking and savings accounts. But be sure to understand the policies of your agreement to avoid bouncing a check or incurring a debt as lenders will know when assessing your loan.

3. Pay Your Bills on Time

This one is self-explanatory. Credit reports will only track money that you have borrowed from a lender. If loan payments are irregular or missing, your credit history will suffer. This will lead to high interest rates on loans or an inability to obtain a loan. There are other ways to prove financial stability such as utility bills or rent, previously overlooked by credit bureaus. These alternative credit scores are becoming popular as a means to prove financial responsibility. This would be worth a mention to your loan officer if you have little official credit history. A smart system when managing your credit history is to pay bills as soon as they arrive, instead of their due date. This will ensure a clean credit report.

4. Apply for a Small Loan

A loan is different from acquiring a credit card. With a loan, you pay back the sum in monthly installments, with interest. A car loan or mortgage is an example of this. Lenders will be more likely to provide a better rate on a bigger loan if you have history managing a smaller loan effectively. For young adults, a student loan is an opportunity to show lenders your financial responsibility. Student loans are unique in that you don’t have to begin payments until 6 months after you graduate – allowing time to obtain a steady income and setting up a payment plan. However, a student loan will not show up in your credit history until you begin making payments.

5. Get Your First Credit Card

If you are financially responsible and have proven it through checking or savings accounts or retailer credit cards, it might be time to get a credit card. Managing a credit card responsibly is an excellent way to establish a clean credit history. A lender will set a credit limit and allow you to borrow that amount of money at any given time. At the end of every month, you are required to make a minimum payment and any balance borrowed will incur interest until you can pay it off. To achieve a clean credit history, you should pay the balance in full every month. If you are unable, at least the minimum payment. 15% of your credit score is based on the length of time you have maintained an account, so it is better to have only one credit card instead of juggling credit cards for lower interest rates.

Conclusion

A strong credit history will make life a lot easier down the road. It is important to learn to be responsible when managing your money as a poor credit can make big purchases challenging. If you are a responsible money manager, it can be valuable to acquire loans and take on risk. The more financial responsibility you can prove, means larger loans and smaller interest rates. Before acquiring any loan or bank account, be sure to communicate with your finance professional and understand the policies of your agreement. The more you understand, the better you can manage.