Building and Repairing Your Credit
What I’d like to share here is how to build credit from scratch and also how to repair existing poor credit. This is based on the experience of my wife and I over the last couple years building our credit and research I’ve done as well.
I’m not a credit advisor, nor a college graduate, I’m just a guy like most of you who felt that it was time in my life to get my act together and get my credit straightened out. If I can get my horrible credit in line with time and determination, those of you with credit histories as bad as mine has been in the past can do it too and believe me, there’s nothing like the feeling of getting that real credit card in the mail that says ‘Credit Limit :$4000’ rather than those joke high risk cards that you have to pay unimaginable fees and interest with that literally come to you with the credit limit pretty much maxed out in fees.
Don’t settle for a worthless high risk credit card, throw those mailers in the trash. Get your credit reports and see what you owe and who you owe it to and see what things you can get taken off your reports too.
Your Credit Rating;
Your credit score is basically used to determine your ability to repay debt...but not only ability, but determination to do so. You might be a millionaire and still not pay your bill’s. Or you might be a pauper and always pay on time. Or you might be somewhere in between where you can pay and want to, but the medical bills are getting into the tens and hundreds of thousands and what you thought you could pay has turned into this monstrous debt that 20 lifetimes wouldn’t get paid off at your present rate of pay. There are a lot of different scenarios, not always directly our fault, but in the end creditors don’t care about our details, they only care about our ability and history to repay what we borrow. And that’s is the point. If we do borrow we should be able to pay the money back.
Some things that affect your credit are;
How stable you appear to creditors;
2 months on the job, in your rented house for less than 5 months, no checking or savings account and you are going to look like a very big risk to just about every lender out there. You have to get established and keep things consistent as possible. Get a checking and a savings account open now and dont ever close them. Age of these accounts is a sign of stability to creditors, especially once you have a credit card. When you open your first card, make sure you keep that account open even if you don’t use it because it is the basis for your length of credit history. Be very careful about closing credit accounts, even if you have too much credit, because firstly not having that account affects your credit history and also your available credit.
Its good to not have more than about 30% of your total credit owed at any given time. So if you have $10,000 avialable credit and $3000 is what you owe, you’re not going to look bad. Close a $4000 account that you aren’t using, thereby dropping your total credit amount to $6000 and suddenly that $3000 debt is now 50% of your total, which can drop your score a few points.
Paying your bills on time;
This is one of the biggest factors, more than a third of your credit rating is based on this and if you have credit cards a single late payment can cause your default interest rate to max out at about 30% and that may very well be a permanent thing...even cards you paid on time may end up defaulting to the maximum interest rate if you pay any other credit card late. We charge everything we buy, and I mean EVERYTHING we buy, then we pay the balances in full on pretty much all of our credit cards every paycheck or every month.
How much you earn;
If you have no job don’t expect lenders to come running to give you an extensive line of credit. Credit ratings are about the ability to repay. If you can’t repay in a timely fashion, then you really have no business borrowing.
How much you owe;
This again is a pretty big factor. If you ‘need’ money or appear to, then you are going to seem like a risk to lenders. I know it sounds contradictory, but you almost want to give lenders the impression that you really don't need their money at all, that you are doing fine without it, and that you are doing THEM a favor by even having their card in your wallet. If you appear desperate for money that sends a very bad impression on lenders who might start thinking that you are a high risk borrower. What this equates to is just make sure you aren’t borrowing much at all. If you have a credit card keep a small balance on it and pay it off every month. What has caused my wife to go from literally no credit to perfect credit in just 2 years was charging everything we buy on her card then paying the full balance off every month. If you do let anything run over to the next month, make sure its not more than 30% of your credit limit on that card ($300 on a card with a $1000 limit, for example).
If you are carrying over any balance watch it very carefully. You want to make sure that you are not adding to your overall debt each month, but bringing it down (say if you did make a big purchase on something) instead. If your debt is going up instead of down, you might need to rethink your purchasing habits...or honestly just think about cutting up the credit cards entirely and not using credit because once this beast sucks you in, you’re game is over for at least 7 years.
How to build credit;
Assuming you have zero credit, the easiest way is to get a Capitol One Visa, or something similar, a real credit card for sure, and start using it. An unused credit account will get you pretty much no where. But, this doesn’t mean you have to make any large purchases. Using your card for your everyday costs, then paying it off in full every single payday will boost your credit rating up really quickly *IF* you are consistent and don’t make up excuses to not pay or pay late. ONE late payment and you pretty much screw yourself for a few years and possibly get your interest rates pushed up to 30% or so and that might be permanent. NEVER pay your card late and ALWAYS pay more than the minimum payment, even if its only a dollar more than the minimum (for example paying $16 on a $15 minimum). But the BEST way to do this is to pay the entire balance off every paycheck. This again shows creditors that you really don’t need their card or credit and you are doing them a favor by even bothering with their card. If you send the message that you are in need or desperate, sometimes credit card companies will actually lower your credit limit without warning or even close your account entirely.
Once you have your Visa or Master Card use it for all of your daily expenses. Remember that you have a bit of a grace period before interest kicks in, so if you get paid every week or every two weeks, use your credit card for all of the daily expenses you normally have and then when you get paid pay off the entire balance immediately. Never, ever let your weekly/monthly expenses roll over. If you spent $400 this week on your card for food and gas, pay that amount off entirely when you get paid. If you charged something else, a new TV, for example, to replace the one that just blew up, thats oks to pay off over a couple months.
Another alternative, one I like less, is to use your card only for nonessential expenses. The reason I like this option less is that you are only using your card for things you may not need, which in the end is causing you to charge things on your credit cards that you may not even need just so you can use your credit account to build your credit score up. This can get you more into debt than you ought to be since these would be nonessentials you are purchasing on a continual basis.
What worked for us;
The way I personally preferred while we were working on my wifes credit and rebuilding mine was to put your check into a checking account and don’t use it except on things you have to. Use your credit card for ALL purchases, then pay the card off with the cash you were going to use for those items.
At this point in the game don’t take on ANY debt you cannot pay out of ONE paycheck. Youre trying to build credit here and getting sloppy right from the start will surely send a very bad signal to creditors.
Use your card for lunches, gas, groceries and any other NORMAL daily expenses that you’d pay for with cash. My wife and I typically spend $300 on gas and groceries for 2 weeks. She pays for those two things with her one credit card so we put all food and gas on that card then when she gets her check direct deposited into her checking, I immediately pay the ENTIRE balance off in full leaving in her account whatever is left over to do with whatever she wants which is typically just to save it.
My bills include rent, Internet access, utilities, car payment, all insurance and our cellular plan. I pay the cell and Internet access bills with one of my Visa’s, then when I get my check deposited I immediately pay the entire amount off.
Now let me say this. 3 years ago my wife had zero credit and I had the most horrific credit rating known to man. 3 years later she has a pretty much a perfect credit rating and my own score is almost in the excellent range.
I got free copies of my credit reports that we are entitled to once a year and disputed pretty much everything on the list and waited till the smoke cleared. I haven't taken on any new debt in a few years, so most of what was on my report was old enough that it had to be removed once I disputed it.
If you have poor credit the first thing to do now is not take on any new debt you cannot pay in ONE paycheck. This includes your bills, gas, food...everything. If you can’t pay for it, dont buy it or you will surely head back down the road to bad credit. That new sound system might be tempting, but if you get it then can’t pay for it, there’s another 7 years minimum before your credit will recover. It’s just not worth it if you are serious about building your credit.
Notes and things;
Here’s something I learned over the last couple years. Say you owe $300 on your Visa. But you need that $300 for gas for your car and other expenses. PAY your Visa bill then use the Visa to get your gas. As long as you pay your bill your account is open and you can use your card for paying for gas or whatever. The bank doesn’t care if its your last $300...all they care about is that you paid your bill in full and on time. Don’t see the situation as an ‘either/or’ thing, PAY the Visa bill FIRST, then you have the $300 to spend if you have to. ALWAYS pay your Credit card FIRST because if you are in a tight spot you can always use the Visa to pay whatever you needed the money for as long as you are paying your credit card payments on time.
ONE late payment though, and you’re looking at two years minimum for that late payment to stop butchering your credit score and in many cases your late payment will send you credit cards interest to the 30% range and from my understanding it may never go back to a normal amount.
Remember your credit rating is basically about your ability to repay and your DETERMINATION to repay. A late payment says ‘this guy doesn’t pay his bills’ and I assure you that after two decades of bad credit that weren’t entirely my own fault (out of control medical bills) that the bank doesn’t care what your reason or excuse is. They ONLY see things in black and white....did you pay your bill in full and on time or not. That is all they see.
The 30% rule;
Another thing that can hurt your credit is having too much charged on any one card. Its better, or for some reason it appears to look better to creditors, to not owe more than about 30% of the credit limit on any single card. If you do need to charge more than that, consider putting the excess onto another card. My wife and I try to use a few different cards if we have more than one large purchase so that the debt is distributed among 4 or 5 cards so that none of them ever get to the 30% mark. I dont understand why this is a factor to creditors, but experience and research show that it is, so regardless of understanding it myself, I try to use the fact to my advantage to maintain a healthy credit score.