Building credit score.

[Sir Casm]

Hi,
I am new to this site and new to saving money (new to money). This is my third thread in last 2 days; my question is about credit score. Here’s my question.

Everywhere I read about saving money they say don’t take loans, don’t use credit card but if I do that how m I going to build a good credit score? I thought you can build ur credit score by taking loans and repaying them on time? Can anyone tell me the best way to go about it? My score right now is 640 (as per freecreditreport.com). I want it to be above 720 .

[disneysteve]

The first question to answer is why is your score so low? Have you made late payments? Defaulted on any debts? Utilized too much of your available credit?

I would NOT take out any loans for the sole purpose of raising my score but there is nothing wrong with responsible use of credit/debt if you need it.

[Sir Casm]

Originally Posted by disneysteve

The first question to answer is why is your score so low? Have you made late payments? Defaulted on any debts? Utilized too much of your available credit?

I would NOT take out any loans for the sole purpose of raising my score but there is nothing wrong with responsible use of credit/debt if you need it.

My score is low because i have only two years credit history. I was out of country before that so had no credit history. And also after college and before i landed a job i maxed out my credit cards, but i alwas made payments on time.

[disneysteve]

Originally Posted by Sir Casm

My score is low because i have only two years credit history. I was out of country before that so had no credit history. And also after college and before i landed a job i maxed out my credit cards, but i alwas made payments on time.

Maxing out your cards will hurt you for sure. Going forward, you should never charge more than 20-30% of your credit line. So if your limit is $5,000, don't charge more than $1,500 and the lower the better. And pay the bill on time and in full every single month. You do not need to carry a balance or pay interest to improve your score.

[JoshuaHeckathorn]

Do you have a spouse or close relative with good credit who would be willing to add you as an authorized user on one of their oldest credit cards in good standing? If so, I think you could use this method to at least boost your FICO scores above 650 so you'll be in the "fair credit" range.

Then you could get one no annual fee credit card of your own, use it sparingly (use no more than 30% of your credit limit), and always pay your bills on time and in full every month. After 6-12 months of responsible use, your credit scores should hopefully bump up in to the low 700s. I wouldn't actually take out a loan to build credit unless you legitimately need the loan for something else.

[kork13]

You can absolutely have credit cards, just use them smartly. Since you have a short credit history, simply holding a couple credit cards in good standing (paying them on time) will steadily improve your score.

When I rented my first apartment with 2 roommates, one of them only had 1 year of credit history, and a score of 640 or something like that. Thankfully, the other guy and I had 4 years of credit history, and we were both around 710 or so (otherwise, I doubt we'd have been able to rent the apartment)... Even at that, only the 2 of us were allowed to sign the lease--the last person was officially a "live-in houseguest".

[Sir Casm]

Originally Posted by kork13

You can absolutely have credit cards, just use them smartly. Since you have a short credit history, simply holding a couple credit cards in good standing (paying them on time) will steadily improve your score.

A couple of credit cards is better than having one?

[Sir Casm]

Spending responsibly is not a problem, I am careful about money that's why I am here. It’s just this is my first serious job and I want to start my financial life on a good note. I want to build a good credit score as soon as possible.

[bjl584]

Originally Posted by Sir Casm

A couple of credit cards is better than having one?

I only have one and my score is around 800 the last I looked. Having more will give you more available credit, which will be weighed when your score is calculated. But it isn't necessary. I would just pick one card that has an offer attached to it that you like. Cash back, hotel points, airline miles, etc. Use it for everyday purchases and pay off the bill in FULL each month. Your score will rise in no time.

Don't ever let anyone talk you into taking on debt as a strategy to improve your score.

[jpg7n16]

Originally Posted by Sir Casm

A couple of credit cards is better than having one?

Think of it this way, a lender is evaluating you, and asking the question how many companies were willing to extend you lines of credit?

Which is better:
a) only one company was willing to take the risk?
b) multiple companies thought you were worth it?

All other things held equal, potential credit lenders prefer to see option b.


My advice, forget your score. Focus on getting out of debt, getting good rewards, and paying off your card(s) in full every single month. Do what's financially in your best interest, and let other people worry about their credit score.

[JoshuaHeckathorn]

Originally Posted by Sir Casm

A couple of credit cards is better than having one?

Don't get caught up on the number of cards you should have. It really doesn't matter. What matters is your credit utilization ratio, which is based on the percentage of available credit you use.

When you start out building credit, there's a good chance the first credit card you receive will have a low limit. Creditors are pretty stingy these days with increasing your limit too, so in some cases it may make sense to add another card or two over the next year. The additional credit you receive should help improve your overall credit utilization and will in turn help improve your FICO scores. The additional positive payment history will obviously help too.

If you're worried about managing more than 1 card, that's OK. Just stick to one, keep your utilization low, and pay it off in full every month.

[JustBill]

FICO also looks at how a borrower handles different types of credit. Meaning just CCs won't necessarily get you in the highest score category, they want to see mortgages and other fixed payment loans. (Yet they consider an inquiry from AT&T as looking for credit, which in my mind is a utility) Let me say I hate all this FICO worship and their prevalence in our financial lives. But it is what it is, not only with loans but it also plays a role in insurance rates. Visit creditboards.com for loads of discussion by many FICO-obsessed people and ways to tweak your score.
OMT, as for having only one CC rather than multiples...that's true to an extent with regard to CL utilization, but if you have only one card and your account is compromised and you're traveling, unless you have cash in pocket or money in checking for your debit card, you likely have a problem. Not to mention if Chase, Wells, Citi decides you've been had excessive usage and shuts your card down.

[Sir Casm]

Originally Posted by jpg7n16

My advice, forget your score. Focus on getting out of debt, getting good rewards, and paying off your card(s) in full every single month. Do what's financially in your best interest, and let other people worry about their credit score.

Yes having multiple credit cards seems like a good idea. Right now I am using about 82% of my available credit ($1010 of my $1200 credit limit). I guess If i have a couple of credit cards and have this amount distributed evenly it won't look so bad.

[JoshuaHeckathorn]

Originally Posted by Sir Casm

Yes having multiple credit cards seems like a good idea. Right now I am using about 82% of my available credit ($1010 of my $1200 credit limit). I guess If i have a couple of credit cards and have this amount distributed evenly it won't look so bad.

Your high CU ratio is killing your scores. Pay down your balance as fast as possible. Don't think about trying to spread the debt across new cards.

Once you pay down the debt, that should boost your scores enough so you can get into the "fair credit" range and qualify for a better credit card.

[jpg7n16]

Originally Posted by Sir Casm

I guess If i have a couple of credit cards and have this amount distributed evenly it won't look so bad.

Originally Posted by JoshuaHeckathorn

Your high CU ratio is killing your scores. Pay down your balance as fast as possible. Don't think about trying to spread the debt across new cards.

Agreed with Josh. The point is not to spread it out so it doesn't look so bad to the FICA people. The point is to pay it off so it's not so bad for you.

[orenwach]

I'm bothered by the fact that you used freecreditreport.com - make sure to cancel that before they start charging your credit card. You should use annualcreditreport.com for 3 free credit reports a year (one per credit agency) or a site like creditkarma.com or creditsesame.com for free monthly updates.

Good luck increasing your credit score.

[mrpaseo]

When I first started out I went to the bank and requested a $1,000 loan. They told me I had no credit history so they recommended I get a "Secured Loan". After explaining what that was, I took $1,000 dollars an put it in an account. They froze the account (I could not touch it) and loaned me the $1,000 dollars.

My original $1,000 was in an interest bearing savings account... I asked them to place the $1,000 dollars in the same account and to deduct them monthly payments from that account. So, I had $2,000 in the account earning interest, with only $1,000 available (My original grand was frozen). Each month they went in and took out $80 or so dollars for the payment and then after 8 months I went back to the bank and requested to settle the loan.

Following this loan, I easily obtained a department store CC of which I charged an item and paid the balance in full each month. Shortly after I obtained my first Visa card.

Simple steps that take a little time,
Ray

[pdweaver]

Originally Posted by JoshuaHeckathorn

Do you have a spouse or close relative with good credit who would be willing to add you as an authorized user on one of their oldest credit cards in good standing? If so, I think you could use this method to at least boost your FICO scores above 650 so you'll be in the "fair credit" range.

Then you could get one no annual fee credit card of your own, use it sparingly (use no more than 30% of your credit limit), and always pay your bills on time and in full every month. After 6-12 months of responsible use, your credit scores should hopefully bump up in to the low 700s. I wouldn't actually take out a loan to build credit unless you legitimately need the loan for something else.

This is going to be your best bet on increasing your score. Follow this post and you will be able to build your score up. It will take time to get there, but it's worth it. Credit is a must. I work at a bank and constantly have customers ask how to build their score. Also, having multiple cards isn't bad. Take a look at credit karma, it's a web site that will provide your score free of charge. They also provide a report card that allows you to input ways that will help raise your score. Most importantly, do not use more than 30% of the credit line and always make payments on time.

[Kooshiball]

How I start was to get credit card (Student credit card) and starts to use it. I did not overleveage credit card something like 20 - 30% use. This should increase the score by 50 or so... Paying back what you owe by due date in every time is essential to boost your credit score.

In spite of needs of using credit card (I can't imagin my life without it...), it is essential to have solid credit score so that you can access to many things like getting the loan.

Good luck!

[thefrugaltoad]

There are many reasons your credit score could be low. Too many credit inquiries, too high a debt to credit limit balance, too high total debt, late payments. Some suggestions: pay off as much debt as quickly as you can, do not miss a due date, and do not take any action that would result in a credit inquiry. Read Finance for Dummies - Credit Reports for further information regarding credit reports. Also use annualcreditreport.com next time for free annual credit reports!