Everyone has a dream.
Some aspire to start their own business or purchase a home. Others wish to plan their retirement carefully, so they have time to relish their golden years. Many wish to travel, to visit beautiful, exotic places and enjoy adventures they’ll never forget. What these different types of people have in common is a desire to work towards something — to build a strong future on a carefully laid foundation. In the realm of finances, your credit score is one of the most important parts of that foundation. A good credit score unlocks new financial possibilities, enabling you to realize your vision for tomorrow. Now is the right time to begin building your score. There are a few simple factors to consider when getting started with a credit plan.
Understand Your Situation
Get an idea of your credit score from the 3 major Credit Reporting Agencies (CRAs) — TransUnion, Equifax, and Experian. Knowledge is power when it comes to your credit, and today’s modern credit snapshot tools like Credit Sesame and Credit Karma allow you to check your credit outlook and contributing factors without affecting your score.
Understanding your score and the impact areas that define it is the first step towards building better credit. The path you take on your way to financial freedom will be paved with the decisions you make now. Coming up with a smart plan for establishing credit makes that path substantially easier.
Note that a common credit score range is 300 to 850. Generally speaking, credit scores above 670 are considered good, while scores above 800 are regarded as exceptional. While a good or exceptional score may seem distant today, you can reach your goal following a proper plan.
How to Build Credit
Building credit may seem like a daunting challenge. In fact, it can be a relatively straightforward process, when armed with the right information. Before you can build strong credit, you need to establish a credit history. Opening a line of credit, such as a credit card, is a great way to start. Making purchases with your credit card and paying them down every month helps to establish you as trustworthy to creditors.
Once you have a credit card in your name, you want to use it actively while paying down the balance consistently. A good rule of thumb is to keep your credit card utilization under 30%. According to FICO, “the percentage of available credit that has been borrowed makes up 30% of your total score.” This is why it’s important to always maintain low credit balances and make sure that you pay your bills on time. If you habitually max out your credit cards or continue to maintain high balances, this can negatively affect your score and make it harder for you to get loans, more credit cards, or may cause you to get higher interest rates.
Why Your Credit Score Matters
Let’s say you own your own business, or you’re looking to start one. When creditors are considering lending money to you, they have to complete their due diligence, to ensure that you meet their lending requirements. A major factor they consider is your credit score, which serves as a straightforward reflection of your creditworthiness.
Running a successful business requires injections of capital from time to time, in the form of bridge loans and other financing options. Without a good credit score, you won’t be able to take advantage of these types of loans, which could spell the difference between success and failure for your company. It’s just one more reason why building and maintaining good credit is so important.
In addition to impacting your ability to receive loans, your credit score affects the interest rates offered with your lending options. It’s important to understand these rates and the credit score tiers that determine whether you will qualify for a loan and at what rate. A reputable financial institution such as Financing Your Way can advise you concerning your loan options and help you understand the ways your credit score affects them.
We’ve established that TransUnion, Equifax, and Experian are the three major CRAs. However, it is important to note that there are hundreds of other agencies that provide credit reporting, with various focuses, roles, and specialties.
Certain lenders may use particular agencies. When applying for a loan, ask your lender what credit reports they look at, and find out where your score stands with the agencies in question. As with all matters relating to credit, the more you know, the better.
When it comes to dealing with debt, the best approach is to always have a solid plan in place. Make a repayment schedule for yourself and stick with it. It’s better to make consistent payments each month and gradually reduce your debt than to pay too much and have to compensate with the use of credit cards and other financing options, creating a cycle of debt.
A trustworthy financial professional at your lending institution of choice can advise you concerning your debt situation and credit plan. No matter how complex or challenging your debt outlook seems to be, there is always an ideal way forward. Remain positive and focused, understanding that you have learned important lessons about debt and that you are now equipped with the knowledge you need to avoid major debt in the future.
Imagine the Possibilities
If you’re trying to build or rebuild your credit today, it can be all too easy to forget about the promise of tomorrow. It’s important to never lose sight of the reasons you decided to work on your credit at the outset. Perhaps you dreamed of starting a new business, one you always wanted to build. Maybe you hoped to take your current venture to the next level, exploring new ideas and laying the groundwork for a stable financial future.
Whatever your aspirations happen to be, always keep them in view. You’ll find that paying down your credit cards, tracking your scores, and managing your debt becomes easier with a clear goal in mind. Soon, experiences that once seemed like major difficulties will look like stepping-stones on the way to success.
You may wish you started building credit earlier. Looking back, you might regret financial decisions such as getting into debt. The truth is that no one ever achieved anything great looking over their shoulder. Make a credit plan today, build your score, and discover how much you can achieve with focused finances and a positive outlook. Your dreams are waiting for you.