Improving Your Credit

Improving Your Credit

Do You Have Good Credit?

In today’s modern world credit is increasingly important. Having good credit brings a plethora of advantages to oneself over those without. There are credit and loan programs available in almost ever corner of the consumer market. These programs can grant access to goods and services to people without the need of a six figure income in order to pay up front. But, obtaining good credit or even establishing credit to begin with can be a struggle.

In this post I will be sharing with you some of my personal tips to help you get and improve your credit. My methods for those establishing credit are virtually fool proof and will help you build your credit from the ground up. Whatever your situation may be there is hope. All scenarios require persistence, time and most importantly patience. You may be able to land yourself in debt overnight, but picking up the pieces is a much longer process. Follow these guidelines to help you solidify your credit-worthiness, make yourself a more advantaged consumer and protect yourself financially in case of emergency.

The Benefits of Good Credit

Before you learn how to get or improve your credit you need to understand credit. Credit, like most other things in life, comes with its pros and cons. Understanding credit is the most important step of all. Consider this a disclaimer.

Being eligible for a loan or a credit card is a liberating feeling. Your first credit account should fill you with a sense of accomplishment and responsibility. This responsibility demands respect. Responsibility + Respect = Reward. If this formula is not followed you will find yourself in a difficult situation. Failure to make payments puts negative marks on your credit report, thus making you less likely to get approved in the future.

Making your regular monthly payment on time is rule #1. This proves to the credit company and potential lenders that you are a responsible customer. Maintaining good marks on your credit report will improve your chances of getting a loan or additional credit when you need it. Keep this in mind if you are planning on buying a house or car.

Improving Your Credit
Making your regular monthly payment on time is rule #1

Understanding Credit

Getting turned down when applying for credit is never a good feeling. Consider this common scenario:

You have never had credit and you go out shopping. You are at the register at Macy’s and you plan on paying with cash. The cashier asks if you would like to save 20% by applying for a Macy’s card. So, you agree, “Sure! I love saving money.” She asks you for some info, taps a few keys on her keyboard and… regrets to inform you that you have been denied credit. You will not save 20% today.

What the cashier failed to mention is that you will only save 20% on your purchase if you are approved for the credit card. Your previously non-existent credit report now has what is called an “inquiry” on it. An inquiry is a mark on your credit that is neither good nor bad, but more bad than good. Every time someone “pulls” your credit, your credit report records that action and could cause your credit score to fluctuate.

Unsecured Credit

The type of credit we applied for in our Macy’s scenario is called “unsecured credit”. Unsecured credit is credit that is not secured by collateral. This is the most common type of credit. Credit companies issue unsecured credit usually, but not always, to those with established credit. Any loan or credit card in which you do not provide collateral falls into this category. Credit cards are not, however, the only form of unsecured credit. Here are some examples of unsecured credit:

  • Credit Cards
  • Medical Bills
  • Payday Loans (stay away from these, I’m begging you.)
  • Personal Loans
  • Student Loans

Secured Credit

Readers who are hoping to establish credit should be paying attention to this one. Secured credit, of course, is the opposite of unsecured. With a secured line of credit, there is collateral involved that secures the loan. A secured credit card is the tried and true, best way to establish credit. Unlike applying for an unsecured credit card, there is no chance of being turned down. That is, as long as you provide the proper collateral.

If you have a checking account or savings account ask your bank about opening a secured line of credit. In most cases you will need to provide a minimum of $300.00 as collateral. After providing the collateral you will receive your card; usually in the mail. A secured credit card works just like the unsecured variant as far as making purchases and making your monthly payments. Your payment activity gets reported to the credit bureaus. As long as you make your payments on time and keep the balance low you will establish undeniably good credit. In some cases after 6 months of responsible use of the card, the bank will return the collateral to you and turn the card into an unsecured account.

Credit cards are among many types of secured credit. Auto loans and mortgages are also considered secured credit since there is collateral involved. The house or the car is the collateral. When a company can repossess your goods in the absence of payment, the credit is considered secured.

Maintaining Your Credit

By now you have established your credit and have an unsecured line on your credit report. Now it is important to keep your credit looking good for future lenders. The same rule applies as before: make your payments on time.

Another rule you need to consider is keeping your balances relatively low on your credit accounts. 30-33% or 1/3 of your total credit should be the limit when you are building your credit. In the beginning, this will be a sacrifice, since your total credit will be low. Only using $100 out of your $300 of total credit every month doesn’t give you much of a buying advantage. But, this will show the credit companies that you are responsible.

Use it or Lose it

Using your credit every month is also an important part of building credit. Yes, you must keep your utilization around 30%, but not at the cost of neglecting your accounts. Credit companies have no interest in lending to someone who does not use their credit. They rely on interest rates to make their money so, if you have little to no balance you will not be attractive to them. Interest rates and APR’s can get complicated. We’ll save that for another lesson.

Hopefully, you now have a better understanding of credit. Use these tools to establish credit of your own, or improve the credit you have. As always, stay tuned to Dean Myerow Finance for more financial tips. We have a lot lined up for the future.

 

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Dean Myerow
Dean Myerow retired as a municipal bond market asset manager for Las Olas Wealth Management in June 2018. He has earned degrees from the University of Massachusetts School of Business and the University of Miami School of Law.

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