How to Build A Good Credit Score


Hey I'm Adam Jusko from ProudMoneycom and in this video I am talking about how to build your credit and how to get yourself to a place of having good credit

So I'm going to talk about sort of the components of the credit score and what to do to get a higher credit score And we'll also talk about what to do if you don't have credit and you need to establish credit or if maybe you have bad credit and you need to get things going again in the right direction So, first off, let's talk about credit scores and how they are put together There are five components to credit scores, and if you sort of do these things right, your credit score is going to go higher and you are going to get approved when you want credit cards or mortgages or auto loans and you are going to get the best rates when you do So the very first component, and this is the easily the most important thing of all, is that you have to pay your bills on time and, in particular, you need to pay your credit card bills on time and your auto loans or your mortgage

and kind of installment loans or debt of that nature You have to pay on time because FICO, which is the sort of biggest company that puts credit scores together, that is what they use they're using your credit cards, your mortgage, your auto loans in particular, so you have to make sure that you pay on time Even if you have a credit card and you can't pay the whole thing, you have to at least make that minimum payment on time The on time is just as important as making a payment each month — it's got to be by the deadline because obviously it shows that you're sort of trustworthy and you can handle things and pay when you are supposed to The second thing to consider is keeping the amount you owe — on your credit cards in particular — down to a certain level

Now different people have different ideas of what this level should be the industry standard that you'll often hear is don't use more than thirty percent of your available credit So let's say you have two credit cards and between them you have a $10,000 credit line Well, you don't want to every month be, you know, knocking your way all the way up to $9,500 You want to keep the amount that you use at least under 30% Even if you're paying them off every month, you really don't want to spend more than 30%

The credit card companies will give you sort of bigger credit lines, but they don't want to see you use them all the way to the top which is sort of crazy in some ways but it shows that you can kind of handle that credit line without going overboard If you're always going right up to the limit and especially if you're trying to even get more credit, it shows that, you know, maybe either you can't handle it or at some point you might be a risk if, you know, if you suddenly can't pay

So even if you're paying it off every month, you don't want to be all the way up to the top So again keep your, what they call the credit to debt ratio at 30% or less Number Three is the length of your credit history Now there's not really a lot you can do about this If you're fairly new to credit, you've had credit as long as you've had it

If you're a little older like I am and you have a longer credit history that is a good thing, but obviously you can't really make your credit history longer and that is a component in your credit score and there's not much you can do about it So you shouldn't really worry about it for the most part The only thing that I will say is that once you have established credit and you do have a credit card in particular — we'll talk about credit cards — once you have established credit, you don't want to close those accounts out, even if you're not using them anymore Say you've got an older credit card, it's your first one, and now you got a better credit card or whatever If you have an older credit card that doesn't have an annual fee and that account's still open, there's really no reason to close it

If you do actually close it, you are going to shorten the length of your credit history Say you got a card three years ago but you don't want it anymore and you just got a new card six months ago Well, if you close out that card from three years ago, all of a sudden your credit history goes from, you know, the length of your credit history goes from three years down to six months and that's not what you want You want to have a longer credit history to show that you've sort of been in the game for a while and that you have been handling credit the way that you should So that's Number Three

Number Four is the credit mix For a lot of people when they're starting out, the first way they're going to sort of get into credit is they're going to have credit cards But over time many of us will, in particular, have auto loans and mortgages that come into play And as far as that credit scoring formula works, if you have loans beyond just credit cards that's a little bit better, it shows that you can handle different types of credit and also that you know you're just sort of established in terms of your life and handling these different things So the more sort of types of credit you have and the better you've been handling them, the more trustworthy you're going to look and that helps your credit score

The final thing has to do with new accounts Every time you open a new account your credit score gets dinged slightly Now if you're good on everything else — you've been making your payments, you have a longer credit history, you have a nice mix of credit, all those sorts of things — it's really not that big of a deal when you open a new account Your credit score might go down a few points and then you know in a month or two it'll be right back up to where it was before But if you don't have much of a credit history, you don't want to suddenly be applying for seven different credit cards and running up this, sort of

either running up debt or running up at least available credit all of a sudden, because it's going to look like you're sort of desperate for credit So you don't want to open too many new accounts at one time And the shorter your credit history is and the less available credit you have overall, the worse that's going to look in terms of you opening new accounts and the greater impact it's going to have on your credit score

So, if you do all those things sort of right those five aspects you're going to have a better credit score Some of those things you can do more about than others, but if you sort of consistently follow that path, over time you are going to increase your credit score and you're going to be eligible for more credit products and you're going to get better rates when you do So now the other thing we want to talk about then well let me back up for just one second Sometimes you'll see online people talking about how you can, you know, improve your credit scores really fast There aren't really that many ways to do it If you have a really bad credit score, you know, there's the possibility that you can sort of percentage-wise increase your credit score over a fairly short time but for the most part it takes some time to build a credit score

It's not something that's going to change overnight But one thing that you should do, especially if you have a bad credit score or you don't really understand why your credit score is not as good as it might be, is you should check your credit reports Now there are three credit bureaus: there's TransUnion, Experian, and Equifax that have a record of the credit cards that you have, the applications you've made in the past, and all that sort of thing So they kind of have this record of you, and you can get it for free There is a website AnnualCreditReport

com that you can go to and you can request, once a year, your credit report from all three agencies So you can check on that credit report and see if what is being reported is actually, you know, what your history is Sometimes if someone has a similar name to you, you might find out that there's some account on your credit report that's really not yours or you might find out that an account that you thought was closed down is still showing a balance even though you paid it off So it's good to check that and make sure that there's not something erroneous on your credit report that could be hurting your credit score So, all that said, for some people, you may either not have a credit history, so you want to establish one, or you may have a bad credit history and you want to obviously make it better

The way that I suggest to most people whether you are new to credit or whether you have a bad credit history is to get a secured credit card Now a secured credit card works just like a regular credit card except you have to put a deposit down — which is refundable after you don't want or need the card anymore It's sort of like getting an apartment — you have to put a security deposit down, you live there, and then when you move out as long as you haven't trashed your apartment you'll get that security deposit back

A secured credit card works the same way: you put a deposit down, you get the credit card, you use the credit card when you either don't want it anymore or the credit card company sees that you're reliable and they then decide to give you a regular unsecured credit card, you'll get that deposit back So, normally, you put down the deposit and the amount of your deposit is the same as your credit line that you're going to get

So say you put down, you know, five hundred dollars you're gonna have a five hundred dollar credit line Now you still have to pay your bills every month just the same way you would with a credit card

That five hundred dollars that you put down, that deposit, is only a backup So you have that five hundred dollars but say you spend three hundred with the card in a month The next month you're paying that three hundred dollars out of your own money, not out of that five hundred dollars that you put down in that initial deposit So, over time, if you have a secured credit card most secured credit cards are going to report to the major credit bureaus and so then that is a way for you to build your credit — either to begin building your credit or to build your credit if you have a poor credit history That security deposit is a little backup for the bank to make sure that you're going to pay Because if you don't pay, eventually they will take it out of that deposit, So that is sort of good on both sides it helps you build your credit, but it also gives the bank a safeguard until they can kind of trust you and know that you are going to pay your bills on time And the good part about that is, for most banks — especially the bigger banks — they're going to kind of watch your history with that secured card, and many times they will actually give you they'll either return your deposit if you're making your payments on time or they will upgrade you essentially to a new unsecured card that works just like any other credit card on the market So that is it Please go to ProudMoneycom for other financial articles and "best of" product lists and all kinds of other good stuff too Thanks

Source: Youtube


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AJ

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