A good credit score and credit history will help you qualify for the best rates for your mortgage and other loans you need to take out. Although, you should be careful about accumulating too much debt, establishing good credit should be a priority especially when you are in your twenties. The financial mistakes you make now may take several years to erase and establishing good credit will help you in the future.
1. Starting from Scratch
Dealing with no credit history is different from having a poor credit history. If you have absolutely no credit you can start by building credit with a store credit card or a basic credit card. You may also do a financing offer from a furniture or appliance store. When making the purchase it may be best to have the cash in hand so you can pay it off completely after a few months. If you do not have the cash you should set up monthly payments so you can pay the loan off before you have to pay interest on the loan. If you are using a credit card you should pay it off in full each month. This will establish your credit history of on time payments without building up a large amount of debt.
2. Understanding Your Score
Before you build your credit score you should understand how your credit score works. It looks at a combination of your credit history, your length of credit history and your current available credit ratio. You should monitor each of these things as you work to improve your score. This means you should leave your oldest credit card open, even if it does not have the best interest rate available. You should make your payments on time each month. This will build a good credit history. Additionally, you do not want to use all of your available credit, so do not let your cards get maxed out. This can negatively affect your score.
3. Fixing Past Mistakes
If you have defaulted on payments in the past you will need to work to establish a better credit score. It can be difficult to find a loan with poor credit. First, you should get current on all of the loans you currently have out. If the debts have gone to collection already you will need to deal with those loans differently. Once you have begun paying your payments on time, you should save up money to pay off the debts that are in collections. A loan marked paid in full is better than one that is settled, but both are better than have a delinquent note. You can settle debts in collections by offering to pay twenty-five to fifty percent of the loan. Do not send any payments until you receive a letter in writing stating that the amount will settle the debt. Keep a copy of the letter on file.
4. Borrow Money Carefully
As you establish your credit score you should be careful about how much you borrow and the terms of the loans you take out. Before borrowing money, be sure that you can easily afford the monthly payments. You should carefully read the terms of the loan. Shop around for a good interest rate, and find out what will happen if you were to miss a payment or be late on a payment. You want a loan that will not send you to collections for one missed payment, since mistakes do happen occasionally.
5. Alternatives to Borrowing Money
Although ,you will need to take out a loan to purchase a home you should consider alternatives to borrowing money, especially after you have established a good credit score. You can use cash to make most of your purchases, including your cars. Choosing not to use credit will save you money on interest, and make you more conscious of the amount of money you spend each month. Start a savings plan and put money into sinking funds to cover things like car purchases and home remodeling. If you need the convenience a credit card offers, you may want to consider using a prepaid credit card instead of a traditional credit card.