How to establish credit is important knowledge for someone just starting out in the world of credit.
If you are, in fact, just starting to build your credit history, you will need to take different steps to establish credit than someone with a long, but tarnished credit history.
If you are young, you will need learn how to establish credit. Often, how to establish credit is not taught in schools.
You can establish credit by getting a credit card and making timely payments. Even a secured credit card will be effective. Never make a late payment and always pay at least the minimum payment required. Both late payments and not paying the required minimum will cause your credit score to crash. So pay the required amounts on time.
Your credit score is a measure of your ability to handle credit. A number of factors related to your use of credit are used to determine your credit score.
Your payment history is the most important factor in determining your credit score. The more reliable you are in making on time payments, the higher your score will be. This means that the first step on the road to learning how to establish credit will be to develop a good credit history.
After a 6 months or so of timely payments on your credit card you should consider another line of credit. Of course you could get another credit card. But, this would be the same type of credit you already have. If you will use multiple credit cards for different purposes, like having one for general expenses and one for home business expenses, then get another card. But, you will improve your credit score faster if you utilize a different kind of credit.
Say you want to repair your car, buy a camera, or go on a vacation. You may have more than enough money saved up, but you should try to establish another kind of credit. So, go to a bank or credit union and take out a personal loan for the amount needed. Then pay the money back over time, always making on time payments.
Yes, taking out a personal loan will cost you a little in interest charges, but you are improving your credit score in two ways. You are applying for new credit and you are showing that you can handle different kinds of credit. Your credit cards represent revolving credit while your personal loan represents installment credit. Taking out an installment credit loan will help increase your credit score.
This is knowledge about how to establish credit that many people do not know. Count yourself lucky for having that knowledge–and taking action.
With a good credit score, your credit card provider may increase your credit limits. And, you may be tempted to spend more, maybe a whole lot more. But, be careful about charging up to the limit of your credit cards. This will hurt you in several ways.
First, charging up to the limit of a credit card is viewed as negative and will likely lower your credit score. The “dept-to-limit” ratio is viewed as a measure of your debt management skills. Many people suggest a debt-to-limit ratio of 10% to 30% as ideal. A higher debt-to-limit ratio indicates poor debt management skills and will lower your credit score.
Second, since credit cards have high interest rates, you will be more likely to have difficulty reducing the amount you owe, and might even miss a payment or pay less than the required amount. This can harm your important payment history.,
By following these guidelines you will work on all the factors considered in your credit score. You will have learned the basics about how to establish credit. And, you will have a clean payment history, show you can manage the amount owed, have experience with a variety of credit types, establish new credit, and you will work on building a long credit history.
How to Establish Credit Summary
Here again are the steps in review:
- Get a credit card; even a secured credit card.
- Make timely payments for 6 months.
- Take out a small installment loan.
- Make timely payments on both your credit card and your installment loan
- Don’t charge to the limit of your credit card; don’t even come close to the limit
As a young person just starting out, these tips on how to establish credit will be very helpful to you.
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