When you borrow money, your creditors begin making regular reports to the credit bureaus that detail your credit activity. Other lenders use information on these credit reports to determine your character, and you may find yourself unable to obtain more credit if your credit report contains negative information. Credit scoring systems are not as complex as many people think, and you can build a good credit history by following some simple steps.
Build Credit
Many lenders refuse to lend you money until you have a credit history, but you cannot build a credit history if you cannot obtain credit. To resolve this issue, you can ask a relative or friend to cosign on a loan or credit card application. The lender approves the loan on the basis of both applicants combined credit scores. Alternatively, you can take out a cash-secured loan, which uses a savings account as collateral. You can get a cash-secured loan if you have bad credit or no credit because the lender gets to keep the cash in the account if you fail to repay the debt.
Pay Your Bills
Few, if any, factors have more of an impact on your credit than your payment history as this accounts for about one-third of your credit score. Credit bureaus keep track of the number of times that you miss a loan payment by more than 30, 60, 90 or 120 days. Every late payment causes a drop in your credit score, and multiple late payments can cause your credit score to plummet. Therefore, you must pay your bills on time if you want to establish and maintain good credit.
Keep Balances Low
The amount of money that you owe has an impact on your credit score. Creditors are unlikely to lend you more money if your existing debt payments already account for a high percentage of your monthly income. Credit bureaus keep track of your balances on revolving credit lines such as equity lines and credit cards. If you keep high balances on these products, it gives credit bureaus the impression that you are struggling financially and your credit score drops as a result of this. Therefore, keep balances on revolving debt low to avoid hurting your score.
Credit Applications
If you want to improve your credit score, you must use different types of credit rather than just using a single form of credit such as a credit card or an installment loan. The type of credit you use accounts for about 10 percent of your credit score, and credit bureaus reward diversity with high scores. However, every time you apply for new credit, you cause your credit score to drop by a few points. Therefore, keep credit applications to a minimum to avoid harming your score.
Monitor Your Credit
Thieves constantly try to commit fraud by opening up new credit accounts with stolen information, and your credit score could drop as a result of a thief establishing new debt under your name. Furthermore, creditors and credit bureaus sometimes make mistakes when compiling credit reports, and a mistake could negatively impact your credit score. Federal laws entitle you to a free annual credit report from each of the national credit reporting bureaus. Obtain your free credit report, review the report and, if necessary, contact the bureau to correct any errors. If you do not monitor your credit report, the actions of others could cause your score to drop dramatically.
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