Creating and/or Increasing Credit Semi-Fast
I recently had a crash course in creating and increasing my credit score and thought I should share. I found an amazingly helpful Youtube video, which will be featured below but since you're here, I might as well break it down. First you have to understand what a credit score before you can go anywhere. Credit is one of the necessary evils of life. It dictates much of our lives. I determines the interests on our loans, if we can even apply for loans for our homes, cars and investments in our education, credit is so involved in our lives that it can determine how much we pay in rent deposit, the point is credit is important and almost inescapable.
To master our credit we have to understand how credit is comprised. There are 5 main criterion in the making of your credit score, those are: utilization, payment history, derogatory marks (including number of inquiries), age of credit, and total accounts (including different types of credit).
Let's dive deeper, what is a utilization? Well utilization is a percentage produced by what your debt is upon the payment due date in relation to your credit limit. This is one of the two most important components of your credit score. You want to keep this utilization percentage as low as possible, and yes, 0% is possible. It is recommended to keep your utilization at or below 30%.
Let's put it in a scenario, Jamila has a credit limit of $1000, her credit card payment is due on the 28th every month, she should only have spent a maximum of $300 on her credit card as it is 30%, which meets the recommended utilization percentage. So when the 28th comes around, it will be recorded that she only utilized 30% of her credit card limit. Jamila is in the clear, but our girl can do better. Next month Jamila spends $300 again, BUT this time she pays off the card BEFORE the 28th, that means she has to pay off nothing on the due date, her utilization will be 0%. Congrats girl!
But life happens right? Let's say the next month Jamila gets a parking ticket for $100 and she's already spent $300, so she now has a $400 debt, that's over 30% utilization, oh no! No worries, as long as Jamila pays off her entire debt BEFORE the 28th, her payment due date, she'll still have 0% utilization. Paying off your card earlier than the payment due date and in full is the best way to keep your utilization low. DO NOT just pay off the minimum with each payment. Sure that little $25 on the due date doesn't hurt as bad as your entire debt but you’re hustling backwards. You're getting got sweetie, if you do this, you’re going to pay interest, and interest is payment to the bank for borrowing someone else's money, aaannnnd it’s bad for your credit score. Get in the mindset of paying early and in full.
Payment history is just that, the history of how long you've been paying off your credit. The older the better, that means you're experienced with credit and you've been at this for a long time.
Onto age of credit, this is about how many years you’ve had the credit card(s). So if you’ve only had your card for say 2 years, don’t open a new credit card because…here comes math 2 years of having a credit card A plus 0 years of having credit card B equals 2 years, now divide that by the number of credit cards you have (2) that makes 1 years worth of credit card age.
Derogatory marks (including number of inquiries) are the times we made no-nos, this includes: over drafting, maxing out the card, defaults, looking into our credit score (some banks have it set up where you won't be penalized, check with your bank). Overall bad behavior.
Total accounts (including different types of credit) is the total of how many cards you have and the different types of credit you have. More goes into your credit score than just your credit cards. You've heard people say it's bad to have a lot of credit cards, well that's not necessarily true, if you're financially literate and responsible the more cards the better. It lets lenders know you're trust worthy. Would you let a doctor operate on you if they've only done 1 procedure or a doctor with 200 procedures? That doesn't mean take out 200 lines of credit dear.
Not only do we have to maintain good credit but some of us don't even have credit to start out! How do you get a line of credit, well first, I do not recommend taking one of those department store credit cards, yes those thigh high boots at Macy's look cute on you but you don't need them and that pushy salesperson doesn't really like you you're just a quota, stop smiling and say no! Instead opt for a secure card. A secure card is a credit card that your open with your own line of credit. Whatever you put down is also your credit limit. I got a secure card and I had to fork over $250, it is a one time payment when opening this line of credit and there may be a bank fee. The card works the same way as a traditional credit card and it is reported to all three major credit bureau (check with your bank). You build credit history and in a year or two you can open a traditional line of credit. Secure card was the way for me, it could be for you too!
- Don’t believe in model of only making ‘big purchases’ on your card, use it for daily spending (Chipotle, gas, Netflix, groceries, etc.) because those are expenses you should already have money for anyways because you’re consuming those things
- File taxes EARLY
- Increasing money in your bank account this includes stocks, bonds, investments etc. mhmmm I know, super feasible but look it’s the game of capitalism, you have to play
Now go forth and get and increase that credit score!