Why you should establish credit
Perhaps you've always used cash for your purchases and you've avoided credit cards. Maybe a life event caused you to lose the good credit you once had. Either way, whether just beginning or rebuilding, maintaining active positive credit is a crucial piece in the puzzle of excellent credit.
- Utility companies frequently check credit and require deposits for poor credit ratings.
- In order to obtain financing when buying furniture, a computer, a car, or even a new home, good credit is a must.
- Commonly employers check the credit rating of prospective employees and those reaching for promotions into management positions.
- Finding an apartment is only half the work as most require a credit check before renting to a prospective tenant.
- When trying to obtain a loan from a bank, good credit is always a minimum requirement.
“Use your credit card to make purchases, but keep balances under 20% of your credit limit for maximum improvement.”
Step one in building a great credit score is establishing positive credit. In order to maximize your credit score increase, you will need at least three positive, active trade lines. These trade lines can be considered a current home, auto, student, or other type of loan that reports to all three credit bureaus. The most important of these types of credit is revolving credit - commonly known as the credit card. We recommend that you maintain at least two major credit cards. For the credit challenged individual, it is necessary to start with a good secured credit card. Here's a link to a great card to start with. Apply Here
Once you've established at least two revolving accounts (credit cards), you'll want to make certain to use these to your best advantage. Obviously, paying on time is critical, however; it's also just as important to use your credit cards at least once every six months in order to keep the accounts active. Fully 30% of your credit score is determined by the balances that you carry on your credit so it's important to understand how this category works if you want to maximize your credit score improvement. Ideally, you will want to keep your balances between 0 and 20% of your credit limit. This is the "A" zone that will have the biggest impact. However, it's important to know that you never want to carry a balance from month to month over 40% of the limit. Even paying your bills on time, this can damage your score.
While revolving credit is the most important trade line to establish for the fastest results, having a mix of credit represents an additional 10% of your credit score. The second type of credit is called "Installment" credit. Installment credit is any loan that has a set payment for a length of time. A car payment is one example of an installment loan. Many stores that sell appliances, televisions, and electronics offer installment payment options. It's important to verify that these payments are reported to credit bureaus so that it will have the benefit to improving your credit score.