We all have our excuses as to why our credit is not up to par. Usually, it entails being young, and we have that one mistake that has stayed with us.
For me, it was a Victoria’s Secret card when I was 18. Who can resist that beautiful, pink Angel Card? I bought a few pairs of underwear, and I was on my way.
However, I forgot about paying the card off until I started receiving notes from collection agencies about my $40 purchase. I ultimately realized what was happening, but the damage had been done. A scarlet letter on my credit report followed me through the next years of my life.
Aside from those of us who made one mistake along the way, another common reason for bad credit is not having built credit in the first place. Many young people just don’t know how to do it, or they don't know they should be building credit at all.
Credit is everything. Your credit score is a factor in qualifying for a mortgage, leasing a car, getting a student loan and getting a credit card.
It can also determine how much you pay for different types of insurance. Employers often run credit reports to determine if applicants are responsible. Individuals with good credit can negotiate better interest rates on a home and lower lease prices on a car.
1. The first step to building credit or rebuilding bad credit is to check your score regularly.
Watch out for anything that looks suspicious because 13.1 million people are victims of identity theft every year. It's not always obvious until you take a detailed look at your credit history.
2. Get educated about how your credit score is determined.
Factors that determine your credit score include the following:
- Number of balances owed (35 percent) - Payment history (35 percent) - Length of credit history (15 percent) - Credit mix or having various types of credit (15 percent) - New credit (10 percent)
3. Get educated about where you stand.
Now that you know your score and how it's determined, find out what that number means.
- Excellent credit: 750 and up - Good credit: 700 to 749 - Fair credit: 650 to 699 - Poor credit: 600 to 649 - Bad credit: Below 600
4. Get qualified for a credit card.
The simplest way to build credit is through a credit card. Get a credit card, but do not max it out.
Remember that 35 percent of your credit score is made up of the number of balances owed, so try to keep a balance that is less than 30 percent of your overall credit line. Make sure you pay on time, every time.
Some cards that qualify for people with fair credit (650 to 699 credit score) are the following:
5. If you can't qualify for a credit card, get a secure credit card.
For those who can't qualify for a regular credit card (usually they have a credit score below 650), a secured credit card is a way to rebuild credit. It is very easy to qualify for.
It requires a refundable security deposit, and it allows you to borrow against the security deposit. These cards generally have very low credit lines, but they do the job in helping you raise your score when they are paid on time.
6. Use your cards regularly.
Once you've obtained your credit card or secured credit card, use it regularly. Do not close it. Having cards open and active for a long time helps the length of your credit history.
7. Don’t take out too much credit at once.
Being overeager in taking out credit is much like being overeager in a new relationship: It does not work. Taking out too much credit at once can damage your credit score, rather than helping it grow.
Start with one credit card, and reassess again on a second card after six months.
8. Be patient.
Building your credit is a long-term commitment. Don’t be discouraged if you do not see an improvement in the first few months.
Credit agencies are looking for long-term consistency. Keep paying your bills on time, and you will see your score slowly creep up.