People always say that you should build up your credit. So, what does this all mean?

 

When you apply for credit, you want to borrow money so you can buy something.

 

But you have to pay back that money, plus interest.

 

We borrow money when we can’t or don’t want to pay the full price for something we need or want right away.

 

We also borrow money to spend it on things that can help us get more money such as a home or into stocks.

 

Along with debt comes the credit score, which is a number that indicates how reliable we are as a borrower. In other words, how likely we are to pay back what we owe.

 

I’ve been in debt before, so I know it’s not fun. Or, if anything, going into debt is a risk, even if it’s for a good reason like going to school, buying a car, or buying a house.  I also had to worry about my credit score when I was looking for loans.

 

I learned that I could get better deals when my credit score was high than when it was low.

 

I can remember when I took out my first loan. At that time, my credit score was not good.

 

It was only “fair.” This meant my rating was between bad and good.

 

The FICO score is the credit score that most people know about.

 

Why does the FICO score matter so much?

 

It shows lenders how well you can manage your money, especially if you already have debt.

 

FICO is an acronym for the “Fair Isaac Company,” which is based in California. This company uses its scoring system to figure out how much of a risk a consumer is.

 

How does FICO figure out if someone is creditworthy?

 

It looks at your credit reports from Equifax, TransUnion, and Experian. These 3 names are the most well-known credit bureaus.

 

And, using 3-digit numbers, FICO also keeps track of each consumer’s credit grade based on his or her debt. These numbers range from 300 to 850.

 

What do these numbers mean, though?

 

You guessed it. The worst score you can get is 300, and the best score is 850.

 

It’s good to have your score above 700, let alone above 720 to be creditworthy. Of course, it’s even better to bump your score up to 750 and above which is an excellent range.

 

It’ll save you lots of money down the road. I’m talking about hundreds to thousands of dollars.

 

If your FICO score is high, especially if it’s above 720, you’ll pay less interest on any debt you have. In other words, if your score is low, you’ll have to spend more money, but if your score is high, you’ll spend less money.

 

Let’s look at two shoppers. Person A has a 760 FICO score and qualifies for a 30-year, fixed-rate home loan with 5% interest. Then there’s person B, who has a score of 659 and gets the same loan for 8%. Each of them gets a $150,000 loan to buy a home.

 

If we do the math, person A would pay less each month (around $805.23), while person B would pay more (around $1,100.65). That is a monthly difference of $295.42! Person A would save $106,351.20 more than Person B over the life of the loan because Person A’s credit score is higher!!

 

I wasn’t happy with my credit score at one point. So, I wanted to raise my score as quickly as possible, and I did.

I was most shocked that I did not need to be good with money or have a lot of cash to boost my score!

How did I do it?

 

I am going to tell you what you need to do to raise your FICO score.

 

1. Pay all of your bills on time, especially all of your debt

 

We all know that we must pay our bills on time. When we pay our monthly loan and credit card bills, these payments affect our credit score the most. 

 

Avoid any late payments so you’ll be on the right track to improving your credit. 

 

Paying off debt on time can even increase your credit score by 40+ points.

 

2. Paying your credit card bills in full every month

 

You want to pay off the entire credit card balance every single month.

 

Lenders want to see that your credit card debt is low when you ask for a loan or more credit.

 

This shows the creditor that you have good money habits and are financially responsible. You also show that you can pay off any debt that comes your way.

 

Lenders would rather see you pay off the whole amount than make small payments.

 

When you only pay the minimum amount, your credit card debt will continue to grow. Since you’re not paying off your balances, the debt keeps getting bigger. Also, interest will keep adding to any amounts that aren’t paid off.

 

When cardholders let their debt grow for a long time, it will be hard for them to pay it off.

 

Consumers with higher debt balances are high-risk.

 

3. Get a high credit limit or take out big loans

 

Even though a good credit limit is important, you don’t want to have too many credit cards.

 

Lenders look negatively on people with a lot of credit card accounts on their report.

 

If you have a lot of credit cards, you might be less likely to pay back what you owe.

 

The average American has 3 to 4 credit cards.

 

This isn’t so bad if you can pay off your balances in full every month to keep your debt from getting worse.

 

If you decide to get more than one card, you should get at least three.

 

You can even ask for a raise in your credit limit after paying off your debts for a while. But you should wait until you get that pay raise first from your employer.

 

Getting bigger loans like student loans and mortgages will look good on your credit report, especially if you’ve been making payments on time for a while.

 

4. Keep your credit utilization rate low

 

What does that mean?

 

Let’s break this down.

 

First of all, what’s credit utilization?

 

It’s pretty much like what it says.

 

It’s how much you use your credit card per period.

 

Lenders and credit card companies like to know how much you’ve charged on the card. They use a portion of the credit limit on that plastic card to figure this out.

 

As a general rule, your usage rate should be less than 30%.

 

This is to show that you’re not a high-risk customer.

 

If you go over 30%, lenders will see you as a high-risk borrower.

 

If your card’s cap is $30,000, you shouldn’t spend more than $9,000 each month (30% of $30,000).

 

People in both the middle class and the upper class who earn a decent living tend to have bigger credit card balances.

 

The good thing is that the majority of Americans have good credit scores.

 

Should it worry you if you have a lot of debt but also have good credit?

 

Well, not so much if you make a good living and have a lot of cash on hand.

 

Also, you’ll remain in good financial shape if you’re good with your money.

 

But if your income or net worth isn’t very high, you should be worried. If you earn less money, you might not be able to pay back the amount of debt or credit you took out.

 

Even though it’s smart to stay within the credit limit, it’s smarter to use less than 30% of it.

 

5. Having credit and debt history

 

Let’s say the lender is looking at 2 different loan applicants.

 

Applicant #1 has no type of debt, not even a credit card but makes decent income around $70,000 to $80,000 a year. Also, this same person has been paying all the monthly bills on time.

 

Then, there’s Applicant #2 who makes the same amount as Applicant #1. Yet Applicant #2 has $30,000 of student loan, auto loan, and credit card debt. Person #2 also has been paying the credit card balance in full every month and along with the other loans.

 

Who will the lender find more creditworthy?

 

If you said person #2, you’re correct.

 

Lenders have more information on how person #2 manages his or her money, but they don’t know much about person #1.

 

6. Increasing your average age of credit

 

The average length of credit is also important.

 

You’re probably wondering what that is.

 

You basically take the total number of years you’ve held the credit cards and divide them by the number of cards you have.

 

So, let’s say you have 3 credit cards, but you got them all in the same month and used each one for 6 years. In this case, the length of your credit would be 6 years. 

 

You calculate the years held by each card (6 years) and add them together (which equals 18 total). 

 

Then, you divide 18 by 3 (or by the 3 cards), which gives you 6. In this instance, the average length of credit history is 6 years.

 

But what would happen if you got the same 3 credit cards at different times?

 

If you’ve had your 1st card for 6 years, the 2nd one for 4 years, and the 3rd for 2 years, your credit length would be 4 years. You would add the years together (6, 4, and 2) which would give you a total of 12 and divide 12 by 3 (since you had 3 cards) to get 4 years.

 

So, the average age of your credit would be lower.

 

But here’s the kicker. After you got your third card, your FICO score would go down because the average length of time you’ve had credit would also go down. If you hadn’t gotten the third card, your average would have been 5 years (6 years + 4 years = 10 divided by 2 cards = 5 years).

 

You don’t have to get credit all at once, but it’s best to do it within a short period of time.

 

Your credit background and score will be better if your credit age is higher.

 

7. Taking on secured debt more than unsecured debt

 

It also matters what type of debt you have.

 

Let me explain more about this. 

 

There are two kinds of debt in the lending world.

 

The first type is secured debt, in which the borrower has to give up an asset as collateral or security if he or she can’t pay back the loan. The security can be a bank account, stocks, a house, a car, or anything else of value.

 

The other type is unsecured debt which means there is no collateral included. You could say this debt is the riskiest since there’s no security.

 

It probably doesn’t come as a surprise that lenders prefer the secured loans or credit over the unsecured ones because the creditors can take any of the borrower’s assets if the borrower can’t pay back his or her debts.

 

Mortgages are a good example of a secured loan, since the home is usually the security. If the homeowner doesn’t pay back the loan, the lender can take back the house, sell it, and use the money from the sale to pay off the loan.

 

These home loans are good debt because a person borrows the money to invest in a property.

 

On the other hand, credit cards are usually unsecured debt because many of them don’t come with security. They are also bad debt because the person borrowing the money uses it to buy things he or she wants or needs.

 

This doesn’t mean we can’t use credit cards to our advantage. We need to wisely use them to benefit from them. If you plan to get credit cards, it’ll be better to get the secured ones instead of the unsecured ones.

 

Remember, lenders don’t have a good outlook on unsecured debt.

 

These are the necessary steps to build up your credit.

 

The credit score is so important because it gives you borrowing opportunities such as:

 

• Buying a home

 

• Getting that new BMW that you have wanted so bad

 

• Funding that business you have been waiting to start up

 

That’s why I can’t say enough about how important it is to always improve your credit score.

 

You can request your free credit report once a year at www.annualcreditreport.com  

 

You can get your credit score from the 3 main bureaus:

 

Equifax  www.equifax.com 

TransUnion  www.transunion.com  

Experian  www.experian.com  

If you want to know what could be hurting your credit score, click here.

(If you click on these links, I won’t make any money. These links are for your own benefit.)