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Cash But No Credit? How to Build a Good Credit Score

Achieving a good credit score isn’t a mystery, but if you do not have an established credit history, you may not know where to start.  Your credit score is built over time.  Although it can take a number of years to build an excellent credit score, the sooner you get started, the better.

There are a number of factors that go into calculating your credit score, but essentially, if you have credit accounts (i.e. credit cards), pay your bills on time, keep your accounts open, and don’t get close to the credit limit, you are on the right track.

Why build good credit

There are a number of reasons to build good credit, even if you don’t think you need it right now. For instance:

·      You get better interest rates on loans and credit cards
·      You can get better rates on car insurance
·      Many apartment complexes check your credit report before renting to you
·      A credit check may be part of your employment screening
·      You can qualify for car loans, business loans, and a mortgage

Credit score factors

Some people make the mistake of not using credit at all.  Although minimizing debt by not getting credit cards and loans is admirable, it won’t help you out when you do need a loan. Creditors want to know that you have consistently paid on your accounts in the past and that you are able to responsibly use your revolving lines of credit.

There are three credit bureaus that creditors report to, and the most common type of credit score is the FICO score, which ranges from 300 to 850, 850 being the best. FICO scores are based on the following factors, listed in order of importance:

·      Payment history
·      Debt utilization (how much you owe compared to how much available credit you have
·      Age of accounts (how long you have had credit accounts open; the longer the better)
·      Credit inquiries (how frequently you apply for credit)
·      Credit mix (the type of accounts you have, like loans, mortgages, credit cards, etc.).

4 tips for building your credit history

Perhaps you are on your own for the first time, are new to the U.S., or perhaps you have credit history but would like to improve your credit score. The following tips can help:

1. Start small and make your payments on time.

Don’t go crazy and rack up a bunch of debt in the name of establishing credit. If you do not have a credit history, you can start by signing up for a secured or unsecured credit card, a co-signed credit card or loan, a credit-builder loan, or by being added as an authorized user on someone else’s credit card.

Make all your payments on time, not just with your credit accounts, but also with other accounts, like utility bills or medical bills. If an account goes to collections, it has a huge impact on your credit score.

2. Watch your credit utilization.

Credit utilization is the amount you owe on credit accounts compared to the credit limit. Even if you pay your balance off in full each month, it’s important to watch your credit utilization and to try to keep it at 30% or below of your credit limit.

3. Keep an eye on your accounts.

You are entitled to a free credit report once a year from the credit bureaus—take that opportunity to look over your open accounts and verify that all the information is correct. Dispute any fraudulent accounts or charges.

4. Don’t close old accounts.

Closing an old account that has no balance on it won’t do you any favors, especially if it is one of your oldest accounts. So unless you are paying fees on the account, just leave it open. It will help lengthen your payment history and give you a better credit utilization ratio, two factors that improve your credit score.

Get started now

You can build good credit in just a few years. It just requires consistency and some dedication. It doesn’t need to be something that causes you stress—little by little you’ll get there. Don’t bite off more than you can chew, make your payments on time, and before you know it, you’ll be qualifying for a great interest rate on a loan!

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Kaycee Cuaira's picture

Kaycee Cuaira is a Texas-barred lawyer with an affinity for personal finance and planning. She has lived in Brazil, India, and Mozambique but prefers to live in places with four seasons.

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