Credit is confusing

 There is so much information available to you out there, it's hard to know what is correct and what is only half correct.

Many websites claim that keeping your credit-utilization ratio, that is the amount you owe versus the amount of credit the lender extended you, at or below 30% is the best way to build credit. While they are not wrong, it will help you build credit. It would be raise your score faster if you kept it under 10% or if you're really trying to give yourself a boost, keep it under 5%.

This isn't as easy as it sounds, a 10% usage on a $1000 limit is just $100. Dinner for the family can easily exceed that. But here are some easy to use tips.

1. Pay before your bill cycle ends. Every loan has a bill cycle date. Make a payment to get your balance under that 10% mark. This means that you can max your credit card out anytime you want as long as before your bill cycle date you have made a payment.

Example: 

Credit limit: $1000

Bill cycle date: 18th of each month

Current balance: $400

Current date: 10th of the month

You're currently at a 40% utilization ratio, this can negatively impact your score, it shows that you are spending more than you earn. And that you are relying on credit to make ends meet.

Make a $301 payment before the 18th, and this will actually boost your score.

2. It's easier than you think

You can use your credit card to earn cash back and you can use it like a debit card. Don't spend more money than you have, it's that simple. If you have $200 in your bank account then don't spend more than that $200 on your credit card. Doing so will cause you to leave a balance on the card. Then we are dealing with over utilization of your credit again.

3. Try not to close any credit cards

Closing accounts will reduce the number of accounts in good standing on your report. Rather than closing them, just use them for something small and then pay the balance off. If you leave a credit card without any activity for a while the lender will just close the card. So put your lunch on it once in a while. I actually use a particular card that gives me cash back rewards at all restaurants, I use this card to pay for all my lunches throughout the week. And then I pay the full balance at the end of the week. I always remember never to spend more on lunches than what I have in my budget.

4. Don't apply for too many things at once

The weird thing about credit is that if you apply for credit the application or what is called "inquiry" can slightly lower your score. This is ok when you need new credit or it makes sense to get new credit. But having too many inquiries can impact you negatively. That does not mean that if you need a new car you should not run your credit. It just means if you need something use it otherwise don't open credit cards just for fun. Always have a purpose. The negative impact of the inquiry will be far outweighed by a well paid account over time! Don't be afraid to use your credit. The only way to get better is to use it.

5. Watch out for shady lenders and fees

While credit card fees are very common, some lenders use odd tactics to make money. These fees will need to be paid by you and will use some of your utilization ratio.

Annual fees can be normal, just make sure you know about them upfront. These are fees the lender charges to provide you with the credit once a year. They can range from $0-$600 a year.

Monthly fees are not normal, I would not sign up for a card that charges monthly fees.

Late payment fees are normal, but you should not be making late payments anyways.

Look for lenders that are credible, ones that people have rated or even ask your folks or friends.

Follow these tips and your score will be sky rocketing.

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What affects my credit score?

 If you are into sports at all, your credit score is very similar to an athlete's stats.  If you look up any athlete you can see how many rebounds, assists, field goals, steals they got and missed in a season or even in a particular game.  Your credit score behaves the same way about how you manage your debt.  Banks look at your credit score as a trust worthiness level and will decide to grant you credit, how much that credit will cost you as well as how much credit you can afford.  This is determined by a number of things, here is a list of things that are looked for when choosing a credit MVP.

1. Do you pay your bills on time?

The number one action that can impact your credit is simply paying your bills on time.  Some of these bills will report to your credit bureaus and some will only report if you do not pay them.  For example if you pay your internet bill on time, it will not show up on your credit report, but if you do not pay it, it will show up as a derogatory mark on your credit.  But a credit card payment will show up on your report and will show you in good standing.  The more on time payments you make the higher your score climbs. 

2. Can you afford it?

The second most important thing banks and lending institutions look at is your debt-to-income ratio.  This ratio shows how much income you make versus how much you are borrowing.  For example if you make $2000 per month, asking for a loan that will cost $700 per month will not be approved.  Banks use your gross income (income before tax) to calculate how much money you make.  Then they figure that you will have other bills such as rent or mortgage, insurance, food and utilities. Giving you a loan with a payment that is near 35% of your income will be very difficult for you to afford, so they will not grant you that loan.  The amount that they will grant you will depend on what type of loan you are applying for. A mortgage payment will get a higher debt-to-income ratio than an auto loan, and an auto-loan will get a higher ratio than a line of credit.  That is because a house and car are considered necessary items for a person to be able to live and make money.  In short, the more money you make the more you can potentially qualify to borrow.

3. The mix of account types you have will be critical to your score.

As you are just starting out, you will have what is called a "thin file" meaning you do not have much credit, a small credit card or two and that's about it.  As time goes on you may add some higher limit cards, maybe an auto loan and hopefully a mortgage.  The bigger the mix of different types of credit with good payment history the more you are able to show that you are credit worthy and your score goes up.

4. They say history always repeats itself.

The banks believe this to be true too!  If you have a longer history of paying accounts well over time, then it is probably safe to say that you will be able to pay a new line of credit with ease too.  At the same time, if you have not been paying your accounts that you have very well, then the bank asks why would you pay a new loan well?  Chances are you will not, if you could not afford or manage the stuff you have now, getting new credit will be very hard and/or very expensive.  The nice thing is that since it is all looked at as history, the older a derogatory mark is the less of an impact it has on your score with time.

5. Presence of derogatory marks on your report.

If you have a history that is clean it will show the bank that you are both responsible with your money and trust worthy.  But if you have a few blemishes on your report, that will not only drop your score but will make it more difficult to obtain new credit.

6. Maxed out

Maxing out your credit cards and loans will increase your credit utilization ratio. This ratio shows how much of the credit you have available to you versus how much you have already used. Let's say you have a credit card that gives you a $1000 spending limit, and you have already used $850 of that.  Your credit utilization ratio on that card will be 85%.  The reason this is important is because banks like to loan money to people who do not need the loan, generally speaking this is because they can easily pay the loan off.  Just think if your buddy that makes $10,000 per month and has never needed your help before, has an emergency and asks you to borrow $100, you may be inclined to loan them the $100 because you know they make enough money to pay you back.  But if a buddy who borrows money from you every week and only makes $1000 a month asks your for that same $100 you might think twice!  Keeping your credit utilization ratio low by not "maxing out" the cards will help you keep your score higher.

If you keep these things in mind, you will be sure to be a credit MVP!

What to do if you're just starting out and have no credit.

 

To many it may seem like a cruel game, credit card companies will not give you a credit card if you have no credit and you can't build credit without getting a credit card. So what is a person to do? There is a few methods that can help you solve this problem, there is not a one size fits all solution for everyone so choose the solution that matches you best.

1. Have a parent or sibling add you as an authorized user to one of their credit cards. An authorized user is basically someone who did not have to qualify for the credit card but has access to the credit and is equally responsible for making the payments. This means, regardless of who charged the money to the card, on the due date it's up to the main user and authorized user to ensure that the payment is made on time or both will suffer a late payment being reported on their credit. This is probably the easiest method to building credit. You don't even have to do much. I started off my siblings like this by adding them, they didn't even know. I never gave them a card and I just continued to pay off the balance in full. Within a year they had excellent credit.

Pros: Super easy, fast track to good credit, you didn't do much at all.

Cons: You will need to ask for assistance, if they miss a payment you missed a payment. Your parent or sibling may not want to add you. Some credit cards charge an annual fee for authorized users.

2. Get a secured-credit card. A secured-credit card is a card that is secured by something else, or in other words collateral for something else. Most secured-credit cards are secured by cash. So you can get a $500 credit card, but first to qualify for the card you must give the credit card company $500 to start you off. You might be thinking that's crazy, but essentially what you're doing is paying the bank to give you some trust. So after you pay them the deposit, they hold those funds and give you access to credit. Typically after you have proven yourself (in most cases 1 year) they will refund your deposit and keep your credit card open for you. 

Pros: You did it on your own, builds credit fast.

Cons: You have to pay upfront to borrow your own money. Sometimes it takes longer than a year to get your money back.

3. Open a small department store credit card. Often times if you don't have any derogatory marks on your credit and you have steady income, department stores such as Dillard's, Macy's will issue you a small amount of credit.  My very first card was a Dillard's credit card with a limit of $300. If you make your payments on time and don't leave the card maxed out eventually they will raise the limit of this card helping you build credit even faster.

Pros: Often times you get a discount at the retailer for opening credit. No money out of your pocket.

Cons: Hard to get if you have any previous derogatory marks on your credit report. Usually high interest rate. Low limit makes it easy to max out your card which can hurt your score.