How to Build A Good Credit Score


Hey I’m Adam Jusko from ProudMoney.com and in this video I am talking about how to build your credit and how
to get yourself to a place of having good credit. So I’m going to talk about
sort of the components of the credit score and what to do to get a higher
credit score. And we’ll also talk about what to do if you don’t have credit and
you need to establish credit or if maybe you have bad credit and you need to get things going again in the right direction. So, first off, let’s talk about
credit scores and how they are put together. There are five components to
credit scores, and if you sort of do these things right, your credit score is
going to go higher and you are going to get approved when you want credit cards
or mortgages or auto loans and you are going to get the best rates when you do. So the very first component, and this is the easily the most important thing of
all, is that you have to pay your bills on time and, in particular, you need to
pay your credit card bills on time and your auto loans or your mortgage… and
kind of installment loans or debt of that nature. You have to pay on
time because FICO, which is the sort of biggest company that puts credit
scores together, that is what they use… they’re using your credit cards, your
mortgage, your auto loans in particular, so you have to make sure that you pay on
time. Even if you have a credit card and you can’t pay the whole thing, you have
to at least make that minimum payment on time. The on time is just as
important as making a payment each month — it’s got to be by the
deadline because obviously it shows that you’re sort of trustworthy and you
can handle things and pay when you are supposed to. The second
thing to consider is keeping the amount you owe — on your credit cards in
particular — down to a certain level. Now different people have different ideas of
what this level should be… the industry standard that you’ll often hear is.. don’t
use more than thirty percent of your available credit. So let’s say
you have two credit cards and between them you have a $10,000 credit line. Well,
you don’t want to every month be, you know, knocking your way all the way up to
$9,500. You want to keep the amount that you use at least under 30%. Even if you’re paying them off every month, you really don’t want to spend
more than 30%. The credit card companies will give you sort of bigger
credit lines, but they don’t want to see you use them all the way to the top…
which is sort of crazy in some ways but it shows that you can kind of handle
that credit line without going overboard. If you’re always going right up to the
limit and especially if you’re trying to even get more credit, it shows that, you
know, maybe either you can’t handle it or at some point you might be a
risk if, you know, if you suddenly can’t pay. So even if you’re paying it off
every month, you don’t want to be all the way up to the top. So again keep your,
what they call the credit to debt ratio at 30% or
less. Number Three is the length of your credit history. Now there’s not really a
lot you can do about this. If you’re fairly new to credit, you’ve had
credit as long as you’ve had it. If you’re a little older like I am and
you have a longer credit history that is a good thing,
but obviously you can’t really make your credit history longer and that is a
component in your credit score and there’s not much you can do about it. So
you shouldn’t really worry about it for the most part. The only thing that I will
say is that once you have established credit and you do have a
credit card in particular — we’ll talk about credit cards — once you have
established credit, you don’t want to close those accounts out, even if you’re
not using them anymore. Say you’ve got an older credit card, it’s your first
one, and now you got a better credit card or whatever. If you have an older credit
card that doesn’t have an annual fee and that account’s still open, there’s really
no reason to close it. If you do actually close it, you are going to
shorten the length of your credit history. Say you got a card
three years ago but you don’t want it anymore and you just got a new card six
months ago. Well, if you close out that card from three years ago, all of a sudden your credit history goes from, you know, the length of your credit history goes from three years down to six months and that’s not
what you want. You want to have a longer credit history to show that you’ve sort
of been in the game for a while and that you have been handling credit
the way that you should. So that’s Number Three. Number Four is the credit mix. For a lot of people when they’re starting out, the first way they’re going
to sort of get into credit is they’re going to have credit cards. But
over time many of us will, in particular, have auto loans and mortgages that come
into play. And as far as that credit scoring formula works, if you have
loans beyond just credit cards that’s a little bit better, it shows that
you can handle different types of credit and also that you know you’re
just sort of established in terms of your life and handling these different things. So the more sort of types of credit you have and the
better you’ve been handling them, the more trustworthy you’re going to look
and that helps your credit score. The final thing has to do with new accounts.
Every time you open a new account your credit score gets dinged slightly. Now if you’re good on everything else — you’ve been making your payments, you
have a longer credit history, you have a nice mix of credit, all those
sorts of things — it’s really not that big of a deal when you open a new account. Your
credit score might go down a few points and then you know in a month or two
it’ll be right back up to where it was before. But if you don’t have much of a
credit history, you don’t want to suddenly be applying for seven
different credit cards and running up this, sort of… either running
up debt or running up at least available credit all of a sudden, because it’s
going to look like you’re sort of desperate for credit. So you don’t want to open too
many new accounts at one time. And the shorter your credit history is and the
less available credit you have overall, the worse that’s going to look
in terms of you opening new accounts and the greater impact it’s going to have on
your credit score. So, if you do all those things sort of right… those five
aspects… you’re going to have a better credit score. Some of those things
you can do more about than others, but if you sort of consistently follow that
path, over time you are going to increase your credit score and you’re going to be
eligible for more credit products and you’re going to get better
rates when you do. So now the other thing we want to talk about then… well let me
back up for just one second. Sometimes you’ll see online people talking about
how you can, you know, improve your credit scores really fast. There aren’t really
that many ways to do it. If you have a really bad credit score, you know, there’s
the possibility that you can sort of percentage-wise increase your
credit score over a fairly short time but for the most part it takes some time
to build a credit score. It’s not something that’s going to
change overnight. But one thing that you should do, especially if you have
a bad credit score or you don’t really understand why your credit score is not
as good as it might be, is you should check your credit reports. Now there are
three credit bureaus: there’s TransUnion, Experian, and Equifax that
have a record of the credit cards that you have, the applications
you’ve made in the past, and all that sort of thing. So they kind of have this
record of you, and you can get it for free. There is a website AnnualCreditReport.com that you can go to and you can request,
once a year, your credit report from all three agencies. So you can check on that
credit report and see if what is being reported is actually, you
know, what your history is. Sometimes if someone has a similar name to you,
you might find out that there’s some account on your credit report
that’s really not yours or you might find out that an account that you thought
was closed down is still showing a balance even though you paid it off. So
it’s good to check that and make sure that there’s not something erroneous on
your credit report that could be hurting your credit score. So, all that said, for
some people, you may either not have a credit history,
so you want to establish one, or you may have a bad credit history and you want
to obviously make it better. The way that I suggest to most people… whether
you are new to credit or whether you have a bad credit history… is to get
a secured credit card. Now a secured credit card works just like a regular
credit card except you have to put a deposit down — which is refundable after
you don’t want or need the card anymore. It’s sort of like getting an apartment —
you have to put a security deposit down, you live there, and then when you move
out… as long as you haven’t trashed your apartment… you’ll get that security deposit back. A secured credit card works the same way:
you put a deposit down, you get the credit card, you use the credit card… when
you either don’t want it anymore or the credit card company sees that you’re
reliable and they then decide to give you a regular unsecured credit card,
you’ll get that deposit back. So, normally, you put down the deposit and the amount of your deposit is the same as your credit line that you’re
going to get. So say you put down, you know, five hundred dollars… you’re gonna
have a five hundred dollar credit line. Now you still have to pay your bills
every month just the same way you would with a credit card. That five hundred
dollars that you put down, that deposit, is only a backup. So you have that five
hundred dollars but say you spend three hundred with the card in a
month. The next month you’re paying that three hundred dollars out of your own
money, not out of that five hundred dollars that you put down in that
initial deposit. So, over time, if you have a secured credit card… most secured
credit cards are going to report to the major credit bureaus and so then that is
a way for you to build your credit — either to begin building your credit or
to build your credit if you have a poor credit history. That security
deposit is a little backup for the bank to make sure that you’re going to pay. Because if you don’t pay, eventually they will take it out of that deposit, So that
is sort of good on both sides… it helps you build your credit, but it also gives the bank a safeguard until they can kind of trust
you and know that you are going to pay your bills on time. And the
good part about that is, for most banks — especially the bigger banks — they’re
going to kind of watch your history with that secured card, and many times
they will actually give you… they’ll either return your deposit if you’re
making your payments on time or they will upgrade you essentially to a new
unsecured card that works just like any other credit card on the market.
So that is it. Please go to ProudMoney.com for other financial articles
and “best of” product lists and all kinds of other good stuff too. Thanks.

One comment on “How to Build A Good Credit Score”

  1. sean watts says:

    You can be added as a authorize user to make your average age of accounts longer.

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