Long road to success

Your credit score is the sole thing that you can rely on when it comes to making sure that whatever loan or credit you apply for pushes through. Here’s the problem, though: it’s tricky to build up. It’s a bit like losing weight, really. It’s a long process that may require you to do trial-and-error before you get everything right.

However, that does not mean to say that you can’t build on your credit score as efficiently as humanly possible. All it takes for you is to establish a good credit reputation right from the start as well as developing several habits.

Establishing Credit

To quickly build up on your credit score, you need to show a history of on-time payments and good financial management. But how are you supposed to show that history if you’re new to the whole experience and no one has given you credit in the first place?

Fortunately for you, there are ways to build up on your credit score even if you don’t have that required credit history. It’s not mandatory that you do any of these, mind you, but they do help in establishing a good credit reputation for you in the long run.

1. A Secured Credit Card

If you are starting your credit history from scratch, then you need to focus on first things first: your credit card. If possible, make your first credit card a secured card as it often helps develop sound financial decision-making for card holders.

The way it works is quite simple. When you apply for a secured credit card, you’ll have to meet the typical credit card requirements but you also have to deposit cash upfront. Usually, the amount you deposited will be the same amount set up for the card’s credit limit.

A secured credit card will have the same functions as any credit card I.e. you can use it to buy things and make payments. However, the moment that you start failing to meet payments, the amount you deposited will be used as collateral.

2. Credit-Builder Loans

The name of this loan is as straightforward as it can be. If you have no credit to begin with, a credit builder loan will be your next best option to do build on your credit score.

In this loan, the money you borrow is still held by the lender on a separate account and it would not be released to you until the loan itself has been paid. It’s being like forced to save on money and the payments you make are then reported to the local credit bureaus.

Fortunately for you, credit builders are offered by at least one bank or lender in any community. You only to have go out of your way in finding such an offer in your area.

3. Becoming an Authorised User

You don’t exactly have to be the owner of a card to use it. There is the option for card holders to add other people as authorised users to that card. If you are an authorised user, you can use a credit card to build up on your own credit score and you don’t have to worry about paying for the charges as the card owner is the one legally obligated to do that.

Of course, you should monitor the credit utilisation ratio as going over the credit limit is going to have a negative impact on your score. Also, ask the card holder if their bureau reports authorised user activities. Normally, they would but it would be best to ask first so that you can be sure that your score-building efforts do not go to waste.

Being Creditworthy

Once you’ve established a bit of credit as a base for your score, which usually occurs 3 to 6 months after you’ve opened your first account, the next thing to do is start building on your history. The goal here is to make potential creditors see that you have what it takes to manage your finances, especially to any obligation you will incur down the road.

There is no hard and fast rule as to what credit holders should do to keep their credit history favourable but creditors often look for several actions such as:

1. Paying on Time

One of the first things that creditors look into in your history is whether or not you can settle any obligation on their due dates or, better yet, before. This does not only include charges on your credit accounts but even bills that you have to pay for other essentials like utility.

Keep in mind that going even a day late in your payments is going to hurt your credit score as this gives the impression to creditors that you are not that particular when it comes to timeliness. On the flip side, seeing month-to-month records of on-time payments will show them that you can manage your finances well, boosting your credit score by several points.

2. Maintaining a Credit Utilisation Balance

Your credit utilisation ratio is simply made up by computing the credit you have used versus the credit you have. In order to keep your credit score favourable, you must make it sure that the credit you have used does not go beyond your available.

However, there are times when even trustworthy credit holders have to go beyond their credit limit because of emergencies. If you really have to go over your limit, you should make sure that the amount does not go beyond 30% of the limit.

3. Limiting Credit Applications

Although creditors do not actually mind that you have a lot of credit accounts, what they do mind is if you don’t have the means to keep all of these from becoming delinquent. One credit account is already demanding to keep active and debt-free so imagine having 6 more with their own set of charges, balances, and debts.

If you’re just starting, it is best that you stick to one card for a good 5 years before applying for a new credit. It’s like running a business; you have to make sure that that card is run well before you move on to open others.

Then there is the fact that every new credit application leads to a hard search enquiry from the company you are applying to. One hard enquiry’s effect is negligible at best but multiple ones within a short period of time is going to hurt it in the next report.

If possible, stick to your first credit card for 2 to 5 years. Only when you have built sufficient credit with it and know how to manage your account can you start applying for new accounts. When you do decide to apply for new credit, make sure to evenly space out each application over a long period of time.

Dealing with Credit Reports

A credit report fulfils two functions. First, it gives the credit holder a detailed summary of their activities for the past few months which gives them an idea as to where they should improve for the next report. Second, a report gives potential creditors an idea if you can handle your finances or not by way of the score the report assigns to you.

Here is the problem, though: credit reports are not as infallible as you might think. Either due to man-made errors or glitches in the system, there are misrepresentations in the figure which causes the report, and the score it gives you, to be far from the most accurate depiction of your status as a credit holder.

As such, it pays to be as meticulous as possible when going over your report. Always cross reference it with your own documents to see if something is wrong. The one thing you should be on the lookout for are unauthorised transactions and hard searches as this is a tell-tale sign that somebody else is using your identity.

There are also minor yet still considerable errors to look for such as wrong entries on the report summary, somebody’s balances and debts being attached to yours just because both of you had similar names, and even old debts settled reappearing in the history. As annoying as these minor errors can be, they are far from being indisputable.

Once you think that something is wrong with the report, you must contact the credit reference agency and dispute it. Of course, the agency itself will also contest your claim and present evidence why the report is accurate. It is a must, then, that you always keep pertinent evidences of your transactions if you want the report to be amended.

Going Beyond the Score

In as much as a credit score is important, you must understand that it is merely an arbitrary number or grade. It is not the be-all-end-all for your financial health and, as such, is not worth obsessing over.

When building up your credit score, your focus should not be on the figure being assigned to you but on your activities as a credit holder yourself. In short, your goal must be to develop habits that give off the impression that you are always on the top when it comes to your finances. Ultimately, your actions will be reflected in the score which would lead to potential creditors trusting you more.

Have you had other issues in trying to establish a good credit score yourself? Do let us know in the comments down below.

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