A Down to Earth Guide: How to Build a Good Credit Score

Most of the millennials that I know are either at the most crucial stages of their career, starting a family, or pursuing a second degree. Hence, it won’t …

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Most of the millennials that I know are either at the most crucial stages of their career, starting a family, or pursuing a second degree. Hence, it won’t be far fetched to say that most millennials are at a point where they have to make conscious choices about the direction of their finances. Credit cards are one of things that could help you straighten out some of the kinks in your finances because it allows you to use borrowed funds for some of your expenses. However, a good credit score might be the difference between having a great time with borrowed funds and working like a slave to pay off credit card balances.

A good credit score significantly reduces the odds that your credit card or loan application will be declined. If you have a good credit score, you’ll easily obtain low interest rates when you apply for credit cards and loans. I have also observed that a good credit card makes you a choice customer for financial institutions. After you have gone through different credit card reviews, you’ll be a stronger negotiating power, shop around for higher limits, and get easier approval for rental houses and apartments.

However, without a good credit score, you might find out that credit cards are more of a financial burden than a help financial help. If you are currently without a credit history or have bad credit, you might still be able to move from a position of weakness to a position of strength. This piece seeks to provide simple insights on how you can improve your credit score and use credit cards without stress.

1. A good credit score starts with good financial habits

Many people are trapped in a hopeless race to build a good credit score and they are always looking for debt consolidators that would apply an abracadabra formula to reset their credit scores. All your efforts to build a good credit score will be futile if you don’t have good financial management habits. It doesn’t matter if you are starting without a credit history or starting with bad credit; good financial habits are the bedrock of a good credit score.

Below are some great financial habits that can help you improve your creditworthiness

  • Record every transaction. You should develop the habit of recording ALL your transactions in a journal online or offline .You should record your debits, withdrawals, transfers, and debits right as they happen. Waiting until later might cause you to forget some details.
  • Round up expenses. When recording your transactions, you should ROUND UP your expenses to the nearest dollar. If you ate out and its costs $24.47, you should record the transaction as $25.
  • Round down income. When recording your transactions, you should ROUND DOWN your income to the nearest dollar. If you did a job on the side and you were paid $274.64, you should record the transaction as $274.

    When you record your transactions, you’ll find it much easier to track your finances. More so, you’ll have a couple of bucks extra when you balance your accounts. The key to healthy finances is to make sure that your expenses is lesser than your income.

2. Start with a secured credit card so that you can keep your spending in check

After you have kept a good record of your finances and you can show the bank that you have a stable income and you are able to manage your finances responsibly, you’ll be better positioned to apply for a credit card. However, when you want to get a credit card, start by applying for a secured credit card. Applying for a secured credit card increase your approval odds because the issuing bank has limited risk in issuing you card.

If you get a secured credit card with a limit of $500, the bank requires you to deposit $500 in an account. When you use the credit card for transactions, the $500 account is untouched (unlike a debit card where the money is deducted from your account. The purpose of the money you deposit into the account is to serve as a "collateral" if you default on paying off your balance.

3. Pay it off on time

After you have obtained a secured credit card, the next task is to ensure that you pay off your balances each month (as at when due). Credit card companies make money from the interest they charge you when you fail to pay up your credit card balance. Hence, is NOT in your best interests to carry a balance over.

For instance, if you have a credit card with a $5000 limit and you charge $2000 in a month, but you only pay back $1800, the issuing company will charge you an interest on the $200 that you failed to pay.  If the card has an annual interest rate of 18% a month’s worth of interest on that $200 that you didn’t pay will be about $3. Now, think about what happens when you carry a balance of $5000 – on multiple cards for a number of months. Credit card companies might also charge you a late fee, raise your interest rates, or reduce your limit if you fail to pay up your balance in full as at when due.

4. Don’t use your credit card for emergencies

This one is very simple, straightforward, but somewhat hard to do. Learn to use your credit card for purchases when it would be more stressful to pay in cash and not when you think it an emergency. Over time, I have observed that using credit cards during perceived "emergencies" often lead to impulsive, spur of the moment spending that you’ll later regret.

You’ll get into a store and an 80-inch plasma TV will be on sale at 20% off – it is an emergency because the sale is ending today and you’ll whip out your credit card to make the purchase. Use credit for day-to-day transactions when you don’t have cash and you can’t find an ATM. Save up for all other big purchases.

5. Use Credit card for their rewards

I have different cards for different uses. I have an Amazon.com card that I use when I buy stuff on Amazon. I heard that the Target card gives you a 5% discount on all your purchases so I am holding one of them as well which I use when I go to Target. Some credit card companies offer cash refunds that you can apply to a balance or get as a check in the mail. If you travel a lot, you might want to consider getting a card that offers you frequent flier deals, it also helps if the credit card company has deals with the hotels in which you lodge.

Using credit cards for the rewards that they offer allows you to have multiple cards for different needs. Multiple cards, (when managed property) helps to spreads your expenses and helps you to stay credit worthy.

Strive to be Creditworthy

A credit card has quite a number of pros; however, it could bankrupt you if not handled properly. There’s a difference between having a good credit score and being credit worthy. Having a good credit score means you know are "technically" a good debtor and this could tempt you to obtain an exorbitant credit limit from multiple cards because most banks find it very easy to issue a credit card to you.

You should strive to be credit worthy instead of trying to master a formula for getting a good credit score. If you pay your balances on time and can still have an emergency savings fund, you are well on your way to financial freedom. In being credit worthy, you’ll have a good credit score and you’ll be able to enjoy your purchases without crunching numbers in your head to see how it affects your credit score.
 

 

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