Chances are that if you are interested in building up your credit up, you are either just starting out with no (or little) credit history or you have run into debt problems along the way and now want to build credit so that you can develop a higher credit score, a good credit report, get the best interest rates on loans and so much more that strong credit offers. In any case, let's build your credit credit now.
What follows are 50-plus tips to help you avoid serious debt, assist you to get out of debt, help you stay out of debt, and help you build credit and greatly improve your credit score.
Building good credit starts with getting debt under control and eliminating it. When the debt sirens go off, we can all hear them because they are unmistakable, shrill and should not be ignored. Here are five to look for in your life:
Here are four more red flags to watch for:
We mentioned above about continually dipping into your home equity line of credit to pay current expenses. If you have a home equity line of credit, monitor it closely for red flags that you are heading into deep, long-term debt. Here are red flags to watch for:
Property values rise and fall as we saw in The Great Recession of 2008-2009. Even today, years later, many people are still "underwater" with mortgages because they took out a regular 30-year mortgage and a home equity line of credit. Be very cautious with your home equity line.
Following closely behind the homeowner's home equity line of credit, is the business line of credit. Like the home equity line of credit, the business line of credit can hide a host of problems for a long time, until the line is maxed out.
Use your business line of credit to pay for things like large travel bills and printing bills, which will be reimbursed when the client's payment comes in.
Don't use this line of credit for ordinary expenses...it will come back to haunt you and perhaps destroy the business.Here's how it gets out of hand. The small marketing company prints and delivers brochures for the client. The printing bill is $35,000. The printer needs to get paid NOW! The entrepreneur dips into the line of credit, issuing a check for $35,000 to the printer. By the time the client gets around to paying the printing bill, the entrepreneur has more bills due. The $35,000 is used to pay other expenses. The $35,000 debt sits there in the line of credit account and the business owner starts paying $325 in interest each month.
We know entrepreneurs who had a $250,000 line of credit maxed out that were withdrawn from one day to the next during The Great Recession. If a line of credit like that is maxed out, most entrepreneurs have no way to pay it off if it suddenly becomes due. Bottom line: keep it at zero balance most of the time.
Do you know what your debt-to-income (DTI) ratio is? Your debt-to-income ratio is the amount of your total debt you are carrying in monthly payments divided by your gross income.
The equation looks like this:
Total Debt/Gross Income X 100 = Debt-to-Income Ratio
If you make $5,000 a month and have $1,000 in debt payments, your DTI is:
$1000/$5000 X 100 = 20%
Financial pros like a DTI of under 36% overall. If it is over 40%, you are heading for disaster and it is a major, major red flag for you.
If, after reading the above sections, if you see red flags waving or if you have tripped off a few alarms, stop spending money on all optional items now! What's optional?
Your first step is to fully understand the scope of your debt. Begin by creating a table, similar to the one here in which you will add all of your debt, all of the money you owe on one page, along with other key information.
Get your credit report and go over it with "a fine-tooth comb," as they say. You can get a free credit report once a year or you can pay for it if you need it more often. Once you have a printed copy of your report, sit down with pencil, pad and calculator and go over the entire report noting the good, the bad and the ugly. As you go over the report, look for errors and report them to the credit monitoring agencies listed here. Look for accounts that you did not open, in case of identity theft.
Get your credit score. Your credit report and your credit score are not the same thing. Your credit report delves into your credit history, the number of accounts you have and much more. Your credit report is a simple three-digit number between 300 and 850 that sums you up for creditors. Your are entitled to a free credit report each year; you usually have to pay for your credit score, although some credit card companies claim to send along your credit score each time they send you a monthly invoice/bill.
Once you have obtained your credit score, what do you do with it? First, you need to analyze it to see where you are on the spectrum of credit-worthy people.
The credit score or FICO Score, as it is often known, ranges from 300 at the bottom to 850 at the top. We don't know anyone at the bottom or top, most of us are somewhere in between.The average score is around 692. Here are the ranges:
Why should you take full responsibility for your debt if it wasn't your fault to begin with? Taking full responsibility is empowering for you. If you take full responsibility for the situation you are in, then you have the power to get out of that situation. Don't blame it on the credit markets or the recession or your alcoholic significant other who drained your bank account and abandoned you. Yes, accidents happen, disaster occur, credit markets crash, and people leave people. This isn't a matter of blaming you, blaming the victim. Rather, it is empowering because if you can see where you have control of your situation, you can get out of the mess.
How to pay off debt fast is integral to build credit. But before you can create a plan on how to pay off debt quickly, you need to fully understand the scope of your debt. Begin by creating a table, similar to the one below in which you will add all of your debt, all of the money you owe on one page.
Once you have all of your debts listed, write down 20 options for paying off part or all of your debt. Write quickly. Do not judge what you are writing or how realistic the idea is, just write it down and then go to the next and then the next. Once you have 20 ideas on paper, go for another 20. When you get that done, try for a third group of 20. Why? You want to try to exhaust most of your options for paying off your debt. Include such items as taking a second or third job, moving to North Dakota to work in an oil field for $10,000 a week, cutting food bills, commuting with a friend, bringing coffee to work rather than stopping at an expensive coffee shop, calling Uncle Charlie for a long-term loan, moving home with the parents, cashing in the 401k, declaring bankruptcy, etc. Do we want you to cash in your 401k or declare bankruptcy? No! The goal is simply to get most of you possible options in one place. Then rank them from one to five with 1 being most realistic and doable to five, which are the least realistic and doable.
If you are having problems keeping up with your debt, but have not yet fallen behind, do all that you can to stay current on your debt payments and maintain your credit score. If you have fallen behind on some, do what you need to do to catch up.
Why? Falling behind or having late payments will cause your credit score or FICO score to drop. Once your credit score drops, it will be harder for you to refinancing your loans and you will be charged a higher interest because of your lower credit score. Sometimes, it is simply a matter of getting your spending under control and focus on paying your bills. If you have to, temporarily take a second job to get on top of your bills. It will pay you huge dividends in the long run and you will be happier for it.
Here is a good, practical way to pay down debt. If you have five credit cards or loans that you must pay each month, pay the minimum on four of them and aggressively go after the fifth one putting just as much money as you can to pay off that account. When that is paid off, go after the next one.
Pay off balances with the highest interest rate first because those balances are costing you the most money. When one debt is paid off, take the money you were spending on that account and apply it to the next one.
Sell two classes of “stuff” that you have and use that money to pay off creditors. The first group are expensive items, expensive presents you bought for yourself. Sell them and use the proceeds to pay down debt; the second class are items, while not of great value, continue to cost you money, like the sailboat with mooring privileges at the boat club. The sailboat may be worth just a few hundred dollars, but the expenses that go with it can be large.
Sometimes debt can throw you for a loop and cause you to make more mistakes, which worsens the situation you are in. Some of those are:
They say that success leaves footprints. So do high-credit people. Here's what they do starting young that you can begin to implement today:
If they are true friends, they will stick with you, even if you cannot follow them to expensive restaurants and weekend getaways. If you can no longer (or never could) afford the lifestyle of the rich and famous, you need to quite it and find new friends and new pursuits.
If you are fast and free with your money, you need to changing your spending habits. Anytime you are tempted to spend money, ask yourself this: Can I afford this purchase without putting it on a credit card? If the answer is no, then you can't afford it.
Pick out your lowest interest most rewarding one or two credit cards and retire the rest to a place near your financial records. Don't destroy or close these credit card accounts because that will impact your credit score, but do put the away.
Call all of the banks and lending institutions with which you deal and simply ask them for lower interest rates on your accounts. Say that you have been a loyal customer for X years, always paid your bills on time and you want a lower interest rate. You could cut your interest charges by hundreds of dollars a month and use the excess to pay down credit cards with outstanding balances.
Taking a second or third job to reduce your debt loan sounds completely unappetizing to all of us, but it is something to consider to get your debts down to 0 fast and keep them there. Often times, by taking a second job and cutting all of your controllable costs (and not running up new charges), you can often pay off debt quickly. Once you stop making all of those debt payments, you will have a lot more disposable income and you can quit that second job, but do be careful of future spending and plan it out well. Another option might be to keep that second job and apply all of those funds you were spending on debt and put it into a high yielding savings account to finally begin saving for your future.
There are generally five ways for you to consider getting out of debt including:
Use a Combination of Approaches
There are pros and cons to each that you must carefully consider with the help of a qualified financial and legal professional
Find cheaper everything including your apartment, car, insurance, the works! In desperate situations, move back home, if they will take you! It will amaze you on how much money you can save. An important example is commuting to the job. Unless you work in jogging distance from your home, commuting adds up to a considerable expense for most of us. If you are traveling to an urban area by yourself in a private automobile, you can probably save hundreds of dollars a month. Even if you are commuting by train or bus, if you become part of a carpool, you might be able to save big. Look at all areas of your finances and cut all controllable costs!
If you have managed to stay current on the balances you owe, check with your lenders to determine if there are lower interest rate loans available to you. Refinancing can be a dramatic way to lower your monthly costs and get loans paid off more quickly.
If you are older and drowning in debt and have whole life insurance, consider cashing in the policy or the the cash-value portion of it to get that big debt paid off to give you financial peace of mind.
Going shopping is an easy way to throw you off your best laid plans for getting out of debt. If shopping is a hobby of yours, find a new past time that doesn't cost so much money.
If you have been getting those promotion checks in the mail that offer you low or no interest rate charges on sums that you transfer within a specific period of time, consider them, but remember, they are not without risk or impact on your credit score. Plus they can cost a little money to make the transfer, even if the interest rate is zero.
Create a long-term financial plan and include where you want to be in a year, five years, 20 years. Things happen to change the best laid plans, but you need a plan to begin with and then adjust it as the reality changes.
Layout of monthly budget. Create a monthly budget that accounts for all of your fixed expenses and your debt repayment expenses. If you are able to put together such a document, you have already won your battle with debt. Now it is just a matter of time and commitment.
Create a a paper file and keep it in a safe place of all of your important documents.
While you may need to cut costs in order to see you through your debt crisis, don't be penny wise and dollar foolish by not having adequate insurance for both your property and yourself. Without the right insurance, you have a disaster waiting to happen.
Use student loans only to pay for college that you cannot afford to pay for right now. Using student loan money as if it were cash income will come back to haunt you later and impact you for years. Need income? Get a job!
One quick way to get your spending under control in a debt situation is to leave all of your credit cards at home and spend only cash. It will focus your spending and do away with all of those "lost transactions" you do, like $20 on a credit card here, $40 on another and $60 on another. If you use just cash, there is less of a chance to spend an excess amount.
Yes, there is good and bad debt relatively speaking and you need to appreciate the difference between the two in order to reduce debt and build credit.
Good debt is "investment debt" so that when you borrow money, you expect to make money on the borrowed funds. What are examples of good debt? Home mortgages, loan for a college education, a business loan to start or grow a business and other real estate loans.
Bad debt, the kind of debt you want to hit head-on, are epic in our society. Purchasing a new car, clothing, expensive vacations, appliances are all examples of bad debt because the moment you make the purchase, the price of the item, the new car for example, drops in value. The differences between good debt and bad debt are often subtle: If you buy a vehicle, let's say a hamburger wagon, to start a business selling coffee and food to office workers on their way to work, would be an example of good debt. On the other hand, buying a $250,000 house in a $250,000 neighborhood and then installing a $50,000 kitchen is an example of bad debt because in all likelihood, you will never recover that money on the sale of the house, because it remains a$250,000 neighborhood.
Taking out a home equity loan to pay for a big vacation is an example of bad debt. Taking out a home equity loan to pay off a $20,000 credit card debt for which you are being charged 18 percent interest is an example of good debt.
Minimum monthly payments on credit cards is like someone with their hands around your neck and squeezing you...not enough to choke you to death, but certainly enough to make it hard to breathe.
The only thing banks like more than you making a minimum monthly payment is for you to be late on a couple of payments so they can jack up your interest rate to 18 percent. With an 18 percent interest rate and a minimum monthly payment, money will keep rolling into the bank for as long as you can stand.
Sadly, if you have run up a $5000 debt on a credit card with an 18.9 percent interest rate and a 4 percent minimum monthly payment ($200), if will take you 137 months to repay this loan and you will wind up making total payments of $8,109.16 in payments. If you were to double the minimum payment to $400 a month, you could pay off this card in 63 months with a total in payments of $6202.
Life is iffy, that's why we all need an emergency fund amount to see us through tough times. But how much? How to we save it if we are spending almost everything we bring in, or worse, spending more than we are bringing it?
As a rule of thumb, financial advisers suggest enough money to carry you for three months, if you are employed and six months if you are self employed. Others suggest a one-year emergency fund for all. A highly successful contractor we know recommends a 2.5-year emergency fund. He has since built a strip shopping center on property in front of his office building with money from his emergency fund, considering that monthly rental an adequate emergency fund for now. He will only need the money from these rentals if he has an emergency, so he is investing the total income from these stores in a high-yield money fund to increase his current emergency fund total.
If you are overwhelmed with your debt and looking for a quick fix to get out of debt and get on with your life and you are looking at a debt settlement program, tread carefully and seek advice from a financial adviser or a lawyer steeped in knowledge about bankruptcy and debt settlement.
If you are considering debt settlement or debt consolidation as two potential ways to relieve the debt you are carrying, make sure that you understand the difference between the two and the pros and cons of each. In its most simple form, debt settlement reduces the amount of debt you have, while debt consolidation reduces the number of creditors you have. Compare and contrast both strategies before you undertake one and do not try either without consulting a qualified financial advisor.
If cash seems to fly through your fingers and you struggle to get a handle on debt and build credit, leave your credit cards at home and get your paycheck deposited directly into your checking account and set withdrawal limits of how much you can take out from an ATM in one day.
Don't try to hide from creditors if you have fallen behind on your payments. Contact them and determine what can be done to work out a new payment schedule. Nothing makes a lender more nervous than having someone with late payments who they are unable to reach. If you contact them early enough in the process and show a willingness to work through your problems, they will generally be more than willing to help you. If you have fallen three months behind and are completely out of contact with the lender, they will be in no mood to cooperate with you.
Once you have made the decision to commit yourself to getting out of debt and rebuilding your credit, you will see ways to begin freeing up money in many areas of your life to focus on reducing that debt. One way to do this is to always use price comparison sites before buying anything. Take it a step further and see if you can buy similar items on eBay and a dramatic discount in price. Frequent coupon websites as well. There you will find people who have truly mastered the art of shopping with coupons at stores like CVS for major savings on everything,
Canceling a credit card that you are not using can actually hurt your credit score. What you want to do is retire it to a safe place where you keep your other financial records? Why? When your credit score is being calculated, one of the things that the three credit reporting agencies look for is your total available credit. If your total available credit is $30,000 on three credit cards and you cancel one of the cards with a credit limit of $10,000, this will reduce your overall available credit to $20,000, which will cause these credit reporting people to possibly lower your credit score. Another way that canceling the credit card could hurt you is because you will then be utilizing a larger percentage of your available credit. If you are using at total of $10,000 of your available $30,000 in credit, you are using about one-third of your available credit. That's higher than want banks like to see, but it is okay. If you cancel one of the three credit cards, now you are using 50 percent of your available credit. They like that less. What they really hate to see is you maxed out on all of your credit cards.
If you are charging various purchases, writing out checks, paying cash, withdrawing money from the ATM and not accounting for it, stop! Money is sailing out and you do not really know where it is going. Figure out one or two ways to spend your money and stick to it. For example, pay for everything through your checking account and stick to it. Obviously, you are not going to pay for a take-out coffee with a check, so each time you write out a check for cash, place it in an envelop, not your wallet, and write down where you spend your money. At the end of only one month, you may be amazed at where the money is going and place where you can reduce spending with little or no pain. But first you must get a handle on all of the outflow.
Anytime you get in a windfall of cash, use it to pay down debt rather than buying a present for yourself. This includes tax returns, bonuses at work and, yes, your increased salary from finding and taking a better job. Most people, when they get a better, higher paying job, will crank up spending and debt. Be smart, use the extra cash flow to reduce and then eliminate your debt. Once you get all of that debt out of the way, take all of the money that you have been spending on loan replacement and put it into a high-yield retirement account each month.
Take 20 percent of your monthly disposable income to pay down all debts until they disappear, then use that money to build up your emergency fund and then retirement savings.
If you have money flowing out in every direction, get control of it by making a list of where your money is going, then readjust where you are spending it. If you are an entrepreneur, the above advice goes doubly for you because a small business can be an endless money pit of leased equipment, employees, expense accounts, etc.
Everyone has overspending triggers and if you want to get debt under control and build credit, you need to find and eliminate them. It could be the people who you shop with, the mood you are in, anything. You have to figure out what makes you spend money and stop or change it. One debt-ridden reader told us that she had a very special spending trigger that she employed every time she wanted to spend money that she couldn't afford. It was: "I didn't come all the way from Missouri to New York City to...(fill in the blank). When she wanted a new pair of shoes she could not afford, it was..."I didn't come all the way from Missouri to New York City to skimp on shoes for New Years Eve." She spent $600 on the shoes!
A reader who had a weight problem and a spending problem told us that a therapist he was seeing suggested that he say no to himself once a day. He described it as dreadfully painful at first. When he went into Starbucks to buy a coffee, he said "no" to himself about adding the five teaspoons of sugar he normally added to one cup of coffee and started drinking it only with skimmed milk. He improved his "no" skills and started losing weight after 20 years. Then he began to apply it to spending. Today, he says, he has his weight and spending under control.
When you borrow money, and that includes using a credit card, be sure you understand all of the terms and conditions of all your loans so that you do not run afoul of the lender.
With the increased banking regulations today, banks are hemmed in on where they can make money and are just waiting for you to make late payments so that they can tighten the interest screws on you. Don't let them. Start automatic payments on all of your credit cards and loans for the minimum monthly payment. We don't recommend that you make only the minimum payment, we think you should pay more if you can, but at least the minimum will get in there on time and preclude you being charged extra interest going forward because you were a little late.
If you have a take-home of $5,000 a month, plan how much of that you want to save and then you will know how much you have to spend. For example, if you are going to save $1,000 a month, that will leave you with $4,000 to spend on everything else. That is an example of your savings dictating your spending. If you get your $5,000 paycheck and spend $4995 a month, that only leaves $5 for savings. That is letting spending dictate savings.
Use barter wherever you can to save time and money. You are skilled at certain things, others are skilled at other things. If you are an accountant, trade doing someone's taxes with a painter or plumber for their services.
Use all means at your disposal to get your student loans under control. Get ideas from sections in this website and other websites to reduce your loan repayment and interest charges to a minimum.
Your credit and finances might be on the rocks right now and one of the reasons could be identity theft. You will not know unless you check all of your records. Start with your credit report for any accounts that you did not open or anything that seems funny to you. If for example, someone opened a credit card account under your name, ran up a large bill and did not pay, that could be impacting your credit score, how much interest you are paying for everything, and so much more. <Identity Theft>
If you have already been hit with some of the consequences of poor credit, like losing your credit cards and being closed off to most lending. One thing you might be able to do to improve yourself going forward is to get a a secured credit card and then carefully pay the bill on time.
The secured credit card is reported to the credit agencies just like a regular credit card is, but here is the difference. If you have a secured credit card with a $500 line of credit, you need to have deposited $500 with the bank ahead of time in order to have that credit. At this moment in time, they do not trust you to pay back the money.
The good news is that if you do not max out this credit card and keep any ongoing balance at no more than $100 and pay the bill on time every month, you will get a better credit score over time.
Often when debt begins to close in on a person the tendency is to seek out new sources of credit as a backup, which means typically applying for every credit card offer that can be found. Don't do it if you can possibly avoid it because it can and will hurt your credit score. When the three credit reporting agencies look at your credit report to come up with a credit score or FICO Score, they give the following weight to these items:
The scorers of your credit also take into account the number of financial institutions seeking your credit report, a credit inquiry. It raises concerns. Are you seeking additional credit, if so, how much. Are you having problems paying and is that why they are doing a credit inquiry? Overall, it hurts your credit score.
Aug 27, 15 05:32 PM
Where to Get a Credit Score? Check the three major credit reporting agencies to get your credit score.
Aug 17, 15 06:25 PM
Build business Credit similarly to the way that you building personal credit.
Aug 17, 15 06:23 PM
Does checking your credit score lower it? You can check your down credit report/score without worry of lowering it.
How-To-Build-Credit-Now.com is designed to help you build credit strongly and live a happier, more productive life. Can good credit really assure you a happy life? No, but bad credit certainly will make you miserable, drain your energy, keep you up at night and suck away your time.