Buyer Beware
The journey to a excellent credit score is a simple one. There is nothing out of this world, or insanely difficult about the process or the steps to achieve one. This is something I can attest to as I now have a 750+ credit score at the ripe age of 23. I started my credit journey when I was still in college, and slowly I have worked towards building my credit, with now well over 30k in lines of credit. The steps to achieve this are simple, and the information, is quite simple as well. The only difficult part is staying consistent and implementation of all the information that you will gain from this article. No doubt, you will make mistakes along the way, but that is a part of the journey. So I implore you to give this article a read to learn why it’s important to start building your credit, and exactly what you need to know in order to do so.
Why do I need Credit?
Fair question. Do you want to buy a house? Do you want to buy a car? Do you want to take out a loan? Do you want to start a business? Well if the answer to any of those questions is yes, then you my friend will need to start building your credit. Credit is a way for you to advertise how trust worthy of a person you are when it comes to repaying your debts and handling money. So how are some ways you can build your credit, well, by borrowing and proving that you are someone who is a reliable borrower who will pay back your lenders. You can do this by using the fabled credit card. Some people are taught to avoid credit cards like the plague, however this is a huge disservice , and rather you should take the time to learn how to use a credit card responsibly and play the game. However, for a misinformed individual a credit card can be quite a scary and difficult proposition to manage. Don’t fear, that is why you are here. In order to evaluate how trustworthy of a borrow you are the industry has come together and created something we call the credit score. The credit score is a numerical value that represents how reliable of a borrower you are, this score is critical when it comes to receiving loans for some of the aforementioned luxuries above. The main factors that go into your credit score are your credit utilization, number of hard inquiries, average length of credit, payment history, and number of accounts. Take a look below for breakdown of credit categories.
| Bad (300-629) | Fair (630-689) | Good (690-719) | Excellent (720-850) |
Utilization
Item one, credit utilization. Credit utilization is exactly how the phrase explains, it is how much of your credit you are utilizing on a monthly basis. The general rule of thumb for this aspect of your credit score is to keep your credit utilization below 30% of all your total accounts. Lets say you have 3 credit cards, all of which have a credit limit of about $1,000 dollars. In total you have $3,000 dollars in total credit. Using the aforementioned rule of thumb the total amount owed on those three cards should never exceed $1,000 dollars if you are practicing responsible credit usage that will result in building you credit higher. From a lender’s perspective they don’t want to lend to someone who appears to desperately need the money, and that is why higher utilization can give the impression that you are strapped for cash, and need to borrow money to pay for expenses, which isn’t looked upon favorably.
Hard Inquiries
Going hand in hand with utilization, the number of hard inquiries on your credit history is also considered when calculating your credit score. The rule of thumb for this aspect is not to accrue more than 3 hard inquiries on your credit history every year. Depending on which rating agency this number can be higher or lower, but it is best to keep this number low. A hard inquiry occurs whenever you apply for a credit card, or loan. So this happens when ever someone checks your credit history. The reason why you would like to keep this number low is because this number sort of serves as a reference for how aggressively you are looking for money to borrow. If a bank sees that you have 5 hard inquiries on your report in the last 3 months, that will show that you again may be strapped for cash, and are desperately looking for more credit/ lending options, and that will not be favorable for you to get your credit score higher/ the credit you want, so it is best practice to keep this number below three per year.
On Time Payments
Another very import aspect of the credit score, is making sure you make your payments on time. An easy way to achieve this is to only buy things with your credit card that you can afford with cash, and then pay off your credit card at the end of each month. Not only this, but if you know you are forgetful, then you should set up your payments to be automatically withdrawn from your accounts so that you never forget to make a payment. This aspect of the credit score is a critical one, as lenders want to know most importantly, that they will receive the money back they have lent you. So if you aren’t going to follow any other advice in this article, this is the one that you must follow.
Number of Accounts
The number of open accounts you have is another aspect that goes into crafting your credit score. The more accounts the better. This is the case because lenders want to see that you have a robust allotment of accounts. If other people are comfortable lending to you that will make a new lender more amicable to lending to you and trusting that you will pay them as well. This is the one that will be difficult to balance with the number of hard inquires on your account. So building the number of accounts you have should be a slow and gradual process. This leads to the final aspect of your credit score.
Length of Accounts (Time in the Market)
Finally, the last item that goes into calculating your credit score, is the average length of your open accounts. Lenders want to see that you have a long history of doing all the things mentioned above. So this last step will just come with time, and that is why it is important to jump into the game as soon as possible. The longer you are in the game practicing a responsible usage of your credit cards , the higher your credit score will rise. Be consistent.
On the Path to Becoming an Excellent Borrower
Now that you know the 5 important factors that go into raising your credit score, I encourage you to go out and practice them, so that credit wont be a limiting factor in your life. It doesn’t take a genius to follow these steps, just an ounce of discipline. I can attest to the fact that these tips well help you flourish financially. If you told me 5 years ago, that on any given day I could have access to $30,000 dollars at my own whim, I would’ve told you, you were crazy, but that’s the possibility when you prove that you are a trust worthy and reliable borrower. It doesn’t mean you have to borrow, it just shows you can. Thanks for the read, let me know what you think, and find your excellence.