How Excellent Credit Can Help You Create The Future You Want
Having excellent credit can help with your next steps when you are ready to purchase a new house, buy a new car, apply for a loan and so much more. Your credit can influence a variety of major life decisions, so building it early is important. There are a variety of ways to build your credit, including opening a credit card account, paying bills on time, and managing your finances well. So let's get into how you can get excellent credit.
What is a credit score?
Your credit score is a three-digit number based on information in your credit report, which shows your financial history including items such as credit card balances, loans, and payment history. Credit scores operate from a range of 300-850. Those range you fall into varies based on the credit score model used.
FICO Score Model
Very poor: 300 to 579
Fair: 580 to 669
Good: 670 to 739
Very good: 740 to 799
Excellent: 800 to 850
Vantage Score Model
Very poor: 300 to 499
Fair: 500 to 600
Good: 601 to 660
Very good: 671 to 780
Excellent: 781 to 850
Getting a perfect score is extremely difficult. Most people who aim to have great credit usually have 750+ credit score. This would put you in the high range for most credit score models. Some companies consider 800+ to be an excellent score. Even if your score isn’t great now, you can still improve over time and can reap the benefits from having a good, great, or excellent credit score.
Anytime you wish to utilize a new financial product such as open a new credit card, buy a car, or apply for a loan, lenders will check your credit history. This is known as an inquiry into your financial history. If you meet a certain requirement or threshold of credit, you may be approved. Your credit score is extremely valuable as it shows lenders whether or not you are a financial risk. The higher your credit score, the more likely you will be approved for future products, better rewards, and lower interest rates. The lower your credit score, the less likely you are to be approved since lenders may feel you are a liability, financially unstable, or less likely to pay your bills on time. Some employers even conduct a credit check for potential red flags before hiring you. Their results may have an affect on whether they hire you or not. Overall, great credit gives you the freedom to qualify for the best financial products at the best rates and helps you achieve your future goals.
How to Build Credit and Why That's Important
Establishing credit can be done in a variety of ways. Paying your bills on time and keeping a low credit card balance help build an excellent credit score. However, missing payments or keeping high balances can hurt your credit.
Applying and using your credit card is the simplest way to build credit. As long as you use it responsibly and pay on time, its an effective method in the process. There are many types of credit cards. Some are specifically geared towards building credit, some provide lower interest rates, some grant cash back on purchases, some provide rewards points with travel and so much more. There are even credit cards for individuals who have little to no credit history. Every card has its pros and cons so its best to do your research before applying for one.
One low risk method to build credit is to become an authorized user on someone else’s credit card. As long as they have good credit, yours can grow too. If you don’t want to take the risk of opening a credit card account this is a nice option to have.
Benefits of Building Credit
Building a good credit score is the gateway to many financial and life decisions. These are some of the major benefits of building your credit.
Lower Interest Rates
If you have a good credit score you’re more likely to be approved for credit products, like loans or credit cards with better interest rates. Lenders would look more favorably on someone with a 770 credit score versus someone with a 600 credit score. Many factors are taken into consideration when applying for these products such as income (financial stability) and employment status. The higher your credit score the lower your potential interest rates. Low interest rates can save you thousands in personal loans, credit card balances, and mortgages.
Establishing good credit can save you a ton of money on interest payments and can help you save and invest in the future. Without good credit, you may end up paying much more during the term of your loan.
Great credit can also help you qualify for the best terms on your products as well. You may receive higher credit limits or larger loan amounts on a mortgage. You can even benefit from longer terms on your loan such as a 30 year repayment instead of a 20 year repayment.
Better Perks and Benefits
To get the best benefits from credit cards, you would need a great or excellent credit score. The best credit cards usually offer annual credits on dining and travel, cash back, high rewards, and so much more. Every credit card is different and offers different perks, so it’s best to choose one that fits your lifestyle and goals you want to achieve. If you have a bad or average score, then you’ll most likely miss out on many of these benefits.
How To Get Excellent Credit
1. Payment history
Payment history is the most important factor of your credit score, so always pay your bills on time! This includes rent, car notes, utilities, and cell phone service.
If you missed or were late on a payment, it can stay on your credit report for several years. The impact will decrease over time but it’s best to keep making timely payments and that excellent score you want will be within reach. Autopay is also a great feature to make sure you don’t miss any payment.
2. Credit Utilization Ratio
Credit utilization is another important factor in your credit score so pay close attention. Credit utilization measures the balances you owe on your credit cards relative to your credit limits. (Your total credit card balance divided by your total credit limit)
For example, if you have a total credit card balance of $5,000 across all your cards and your credit limit is $10,000 across all your cards, your credit utilization rate is 50%.
The general rule is to stay below 30% with your individual cards and your total limit. The lower your credit utilization rate, the more likely lenders will approve your various applications and the higher your credit score will be. Lenders believe you can responsibly manage your credit and are not taking on more financial obligations than you can handle.
There are a variety of ways to decrease your credit utilization rate. Here are a few of them…
Pay more than the monthly minimum to decrease credit card balances
Leave cards open after paying them off to reduce overall balance owed, which also maintains the total limit therefore decreasing the credit utilization ratio
Request a credit limit increase but resist spending more as a result of this increase. This may lead to a hard inquiry which may temporarily lower your score a little. However, if you’re building credit these will occur when you apply for new financial products such as credit cards and loans.
3. Opening and closing credit accounts
Be very careful opening too many accounts at the same time. Doing so will result in multiple hard inquiries, which may signal to lenders that you’re taking on more debt than you can handle. Keeping your debt low is great for building your credit score. Pre-qualification tools can help you look around without hurting your credit score. However if you are aiming to build excellent credit, the temporary decrease can be worth it in the long term. Applying for excellent financing, better credit card perks, and more will all be affected. so if you have a plan for the future, it’s better to start preparing now with building the credit you need to make the purchases you want.
When you are thinking of closing an account, remember your credit utilization ratio. You can keep the account open without spending from it, which helps keep your credit utilization ratio down. The age of your accounts also has an effect on your credit score. The longer you have it the better your score can be.
4. Credit Diversity
Your credit diversity also may have a slight impact on your credit score. Diversifying the various types of loan products can also help on your path to reaching an excellent credit score. Never take on more debt than you can handle. Your mix of credit is important but the most important is credit utilization and on-time payments.
How To Check Your Credit Score
There are a variety of ways to check your credit score. Many credit card companies offer a free credit score service just by being one of their credit card holders. You can also buy it from one of the three major credit reporting agencies. These agencies include Equifax, Experian, and TransUnion. When you receive your score, you often get information on how you can improve it. Making sure your credit report is accurate ensures your credit score can be too. You can also have multiple credit scores. The credit reporting agencies that maintain your credit reports do not calculate these scores. Instead, different companies or lenders, who have credit scoring systems of their own, create them. If you are looking to check your entire credit history, you are entitled to a free annual credit report from each of the three credit reporting agencies on AnnualCreditReport.com. Request all three reports at once or one at a time.
Building excellent credit isn't easy, but with the information listed in this article, it can be much easier than anticipated. Managing your finances can be difficult as well. One free service that can really simplify your financial life is Mint. Mint provides accurate up to date information on your credit score with a breakdown of many of the details listed within this article. They also provide a full financial picture if you want to take control of your finances and build better credit. So if you know you are about to make a big purchase, want to set goals, or ready to invest in your future, the time is now to start focuses on the financial freedom you want. Knowing the importance of building credit today should motivate you to build for the future you want tomorrow.
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