Some tips for building credit

Start by saving money now, because you are going to need it. Brian Tracy, the business guru and author of many best-selling business books, teaches us that unless you can save 10% of your earnings, your measure of being financially successful is not good. Another of his tips to remember is that the laws of attraction will compel a savings account to attract even more savings. The bigger it gets, the more you will want to put in there.

Avoid the financial pitfalls of spending too much on wants. Good savers are able to differentiate between needs and wants. Wants always cost a premium and you can always live without them. You need to learn the difference between needs and wants to save money.

Two of the fastest ways to build credit are to have a credit card, car loan, or both. If you have applied for a credit card and been denied, your banker can set aside a portion of your savings in a separate savings account; say $2,000. Then you can use your own money as collateral for a small secured loan. Because the loan is coming from your reputable bank, the interest rate is probably the best you are going to get. Use the loan for something that you need, and that you already have enough cash to pay for if you had to. Examples are things like a new washer and dryer, computer, or car repairs. Your small, secured loan should have a term of just over one year, fourteen months is ideal. Car loans are good because they typically offer a reasonable interest rate, and the regularity of repayment demonstrates your ability to manage a credit balance.

Remember to never, ever use credit to finance your fun. Never borrow to buy toys, lavish vacations, or go out to restaurants. If you do not have the surplus cash then you don’t get to have those things. Starting now, you are to think of borrowing as “Financing.” Don’t pay attention to commercials that try to brainwash you into thinking that it is normal to carry a high-interest balance all your life; “Credit check lets you always know your credit score – so you can be the one in control,” sort of things. Paying interest at 24% should never be considered normal. You won’t be the smart one for knowing what’s in your wallet, what you’ll be is broke.

About half way through your second secured small loan your bank should be ready to issue you a credit card. This is worth waiting for. A rule of business is that if someone approaches you, it is never for your benefit. When you receive credit card offers in the mail you’ll see this theory at work because the interest rates will average 24% and higher. Many rates from reputable banks with which you regularly do business are 19.9%. That is the best you can hope for when building credit.

You are trying to build credit, not carry a balance. When you do use your credit card, always pay the balance before the monthly cycle ends. You can build credit without paying any interest at all. It is a myth that you need to carry your credit card balance beyond a month and pay interest in order to build credit. By paying the balance before the cycle ends, you will build credit a little slower, but you will still build credit. A banker friend of mine recently shared his cheat-sheet for which elements make up a credit score:

35% payment history – always pay on time

10% types of credit used – secured loans or unsecured credit cards

10% applications for new credit – each time you take out a loan or use a credit card

15% length of credit history – how long you have demonstrated good management

30% amounts owed – the balance you carry and pay interest on

By this logic, you can add at least 10% to your credit score for using credit while not paying interest. A good example is deferring an expense for a couple of weeks but paying the entire balance before the monthly interest cycle. Assume that you need new tires and a brake job and the store has a 40% off sale that ends tomorrow. You are not allowed to use your savings. You don’t have the surplus cash right now, but you will have the cash over the next two weeks. This is a perfect time to use your credit card to take advantage of the savings, and since you will be able to pay the balance within two weeks, you will also not pay any interest. You saved money, built up your credit and paid no interest.

Within the time it will take you to save enough for a down payment on a home, your credit score will be in great shape. The combination of your savings and a good credit score will afford you the bargaining power to negotiate a best interest rate on a new home loan.

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