A strong credit score is important in many areas of your life. If it is low, it can cause problems with finding housing, a job, and handling emergency expenses. There is no overnight fix for this, so you should continually work on this as part of your overall financial strategy. If you think you can avoid this by staying away from credit entirely, you are mistaken. No history can be just as detrimental as a poor one in many cases.
Good Credit Give You Freedom
There is no avoiding the fact that sometimes you will need to finance some expenses. Having a cash-only approach to life may sound appealing, but if you choose this path, you will find yourself in a difficult spot when you need to borrow money. Establishing credit, and managing it carefully means that when you need to borrow money, for a house, car, or education, you can do so. One example of this is in paying for college. Private student loans are a popular choice for paying for school. If your score is low or you don’t have established history, you will not qualify on your own. In this case, you will need to have a cosigner for your loan.
It is normal to be reluctant to ask someone else to cosign for you. Even if you ask a close family member, you are putting them in a difficult situation. If something happens, and you cannot, or do not, repay the loan, the cosigner is responsible. You can avoid putting yourself and your loved ones in this awkward situation by having a fair to good history. This way, you will qualify without a cosigner.
A Strong Score Saves You Money
When you have good credit, you qualify for many perks. Your cards will have a lower interest rate, and when you borrow, you will get more favorable terms. Aside from that, prospective employers often check your history during the hiring process. A weak score can put you at a disadvantage when looking for work. Finding affordable housing can also be more challenging when you have derogatory marks against you. You need a decent history to qualify for a mortgage, but even renting can be a challenge. Most landlords will run a check before renting to anyone. While some only care if you have been subject to eviction, many want to know that you make it a habit to pay what you owe before renting to you. Monitor, monitor, monitor, if your in the U.S. we recommend Creditkarma, Building credit starts with checking your score, if your in Australia, U.K. or South Africa then Clearscore is a great place to start. These are all free sites.
You never want to carry a balance, but if an emergency pops up, and you are faced with an unexpected bill, you will be glad to have managed your finances. If you do need to pay for a large expense, you can typically find a balance transfer card after the expense. You can then pay down your balance over 12 to 18 months, at a low-interest rate. Many balance transfer cards offer zero percent interest for a specific period. These options are only available to individuals with a solid repayment history.
What to Do to Raise Your Score
There is no way around the fact that you need to use credit to establish a good history of repayment. If you don’t have any existing history, or it is poor, a secured card allows you to start building or rebuilding. You will need to make a deposit to open the account. If you are a student, you may qualify for a student card. This can be a great way to build while you are in school as long as you use it responsibly. Student cards do not expect you to have a high income, and often give you a reward for maintaining a certain GPA.
If you have existing accounts that have gone to collections, you can expect that to have a negative effect. If you have the money, contacting the company and offering to pay, in exchange for them removing the offending account, can boost your score. If payment isn’t an option, you will need to wait until the account drops off your record. The more time that passes from the negative event, the less of an effect it will have. Paying your bills on time is important. In addition to your cards, your mortgage and even utilities may report if you pay late. Setting your bills up for automatic payments can reduce the risk of the expenses falling through the cracks.
Remember, just because you have a certain amount of available credit does not mean you need, or should, use it. You can make companies nervous by doing so. This is known as utilization, and you want to keep it low. Aim to spend no more than 30 percent of what you have available to avoid having it impact your score. If you make a big purchase, paying down your card before the statement closes for the month will prevent the high utilization from reporting.
Another tactic that makes lenders nervous is when someone shops for a lot of credit at once. This creates the appearance that you may be facing financial uncertainty, and you may find that, even with a solid score, lenders do not want to lend you money. Establishing your history over time will prevent you from spooking lenders. This is another reason why it makes sense to work on your credit as early as possible. Doing so allows you to take your time, spacing out applications, and establishing a solid repayment history with each lender.