I remember when I started establishing my credit score during my college days. I had recently immigrated to the United States to obtain my engineering education. Full of hopes and dreams of buying my first house and living the American dream. I knew I had to establish my credit so banks would lend me money to buy my first home. Since I had only been in the country for a couple of months, my social security number was “fresh out the oven”.
My circumstances meant that I lacked any tangible credit history (good or bad). When I attempted to get a credit card to begin establishing my credit, banks firmly denied my application. Their “reasoning” was that I didn’t have any credit history. I was perplexed. I remember vividly asking the bank teller “how could I ever get credit history if nobody is going to give me a credit card to start the process?” It was a very difficult and frustrating experience.
This felt like a “catch 22”! To get “X” (a credit card) you needed “Y” (good credit). But, to obtain “Y” (good credit) you had to start building it with “X” (a credit card).
Fast forward 10 years later, and now I have an 834 credit score. This puts me at the top 2% of the population from a creditworthiness perspective. It was actually much easier than I had originally thought.
Having a high credit score has opened a lot of financial doors. First, lenders are willing and able to lend me money. This gives me the financial leverage most people need buy wealth generating assets, like Real Estate for example. I cannot pay cash for my investment properties; I need the banks to lend me money. Check out my Real Estate Investing articles: “Buy & hold Rental Properties” and the “BRRRR Strategy” for more info on Real Estate investment strategies. Additionally, good credit also gives me access to the best interest rates available. Consequently, the terms on the money I am receiving are the most favorable.
Now financial institutions desire to lend me money. And they also want to give me the best terms possible. Talk about a “double whammy”!
Establishing a good credit score isn’t hard!
I firmly believe anyone can achieve good credit. Really, if I did it, you can certainly do it too! Even if you feel like the odds are against you, I encourage you to give it a try. I also had my fair share of difficulties: I was a broke, immigrant, college student.
You simply have to be careful and responsible. What I mean by this is that during my credit establishing process, I never “bit more than I could chew”. I approached borrowing with the right attitude and mentality. This means I only used the credit for things I absolutely needed, not for things I wanted. Every time I was about to make a purchase, I asked myself the following two questions: “Do I really need this? Or do I simply want this?
I also had a general rule that I try to follow as often as possible (even to this day). The rule is that the main goal of credit should be purchasing assets, not liabilities. What I mean by this is that I firmly believe you should only use your credit to purchase assets that will generate you money. For example, a mortgage for a studio apartment that you can rent out. Not a fancy car that will be worth 30% less as soon as you drive it out the lot.
Never go in debt for things you want. Only go in debt for things you need! Things that are essential, and ideally things that will make you money. If you want to buy a “liability”, fine, but do it with cash you already have. If not, that non-essential liability is going to cost you even more because of interest payments.
Returning to my story, after failing to get a “normal” credit card, I had to settle for what banks call a “secure” credit card. The way this type of card works is that you first make a refundable deposit to the bank (let’s say 500 dollars). The deposit money essentially becomes your credit limit. Then you start using your card to pay for items within your credit limit. You can use the secure card like you would normally use a traditional credit card. But, if you don’t pay your secure credit card, the bank will simply keep your deposit. (Essentially, the bank has no risk whatsoever.)
I remember I was very careful with that secure credit card. I certainly didn’t want to start my credit journey on the wrong foot. To keep things simple, I only used the secure credit card to pay for my $40 cell phone bill. Each month, I paid the $40 credit card balance in full. After 6 months or so, the bank upgraded me to a normal credit card and gave my full $500 deposit back. The bank also reported my responsible behavior to the credit bureaus.
Mission Accomplished!
There are other initial steps you can take in case you’re experiencing difficulties starting your credit journey. If you’re a student, you could try to get a student credit card. Many banks offer them, and getting approved for them tends to be easier. Because college students shouldn’t have a lot of credit history anyway. Another alternative is to get someone with good credit (i.g. a relative, a friend, etc.) to be your cosigner in any type of “loan”. For example, a car loan, or a lease.
This successful “secure card” experience served as the proper foundation for my credit journey. It taught me the habits that I needed to develop to achieve a high credit score. To make your journey easier I want to share with you the following six tips. These six tips revolved around six important factors that affect your credit. Let’s “unveil” what each one of them entails and discuss a simple strategy on how to succeed:
The main six Credit Score factors:
1.) Percentage of payments you’ve made on time:
You want to keep this at 100%. Meaning, you want to pay every single one of your bills on time. Everything from utility bills to mortgage payments has to be taken care of at the proper moment. I cannot stress enough the importance of this. Paying on time is the fundamental pillar behind a healthy credit score.
2.) Your credit usage:
You want to avoid “maxing” out your credit limit. Meaning, if you have a limit of 10,000 dollars on a credit card, you don’t want to spend anywhere near to those 10,000 dollars. (It will look irresponsible to the eyes of creditors, and somewhat desperate). Additionally, spending a lot of money will most likely get you into trouble. In particular with your high-interest credit cards. Remember, never bite more than you can chew.
When I researched this topic, I encountered various “threshold” numbers. I even found some recommended ranges for credit limit utilization. Some credit experts advocate staying between 20% and 30% of your maximum credit limit. I have remained around 15%, and that approach has given me great results. For example, if you have a card with a $10,000 credit limit, don’t ever spend more than $1,500 with it.
3.) Credit Age:
This is simply the age or “tenure” that all your combined credit lines have. This is why credit experts advocate keeping accounts open, even if they are not being used. Old accounts will look like an extensive track record of responsible borrowing. Keep in mind that this number is an average between all your accounts.
Therefore, it is important to note that opening a new line of credit will bring the average years down. Because of this, it is crucial to start establishing credit immediately. Every day that passes is a day that could have counted positively on your score history. The older your accounts, the better.
4.) Total accounts:
These equates to the total number of accounts opened (and closed) on your name. I currently have approximately 20 accounts. Credit experts suggest having at least 10 (combining open and closed accounts). That being said, my personal recommendation is to have as many accounts as you can handle responsibly. Which means that having only 1 account that gets paid on time every month, is better than having 5 accounts that are late.
It has been studied that having diversity in your lines of credits also improves your credit score. For example, let’s assume you can choose three lines of credit. You can either have three different credit cards or have one credit card, one car loan, one mortgage. Theoretically, the latter will yield a higher credit score because it is more diversified.
5.) Hard Inquiries:
Basically, when you ask someone for a line of credit it gets reported. Asking too frequently to borrow money is frowned upon by creditors. They will think that you’re in desperate need of funds. For example, applying for a different credit card every month, or multiple car loans within a year. Doing that will affect your credit score negatively.
This is especially important when you’re trying to secure a mortgage (since it will hurt your chances of obtaining the mortgage). Hard inquiries typically stay in your credit history for two years. Therefore, don’t apply for any type of credit line if you plan on applying for a mortgage in one or two years.
6.) Derogatory remarks:
These are claims made by borrowing institutions that you have been delinquent in your payments. You should quickly pay and settle all these “delinquent” claims, so they are closed out. Derogatory remarks will get removed from your credit history eventually. However, this usually takes a long time, approximately seven years in certain cases.
Additionally, not all derogatory remarks are created equal. A late cell phone bill, will not damage your credit as much as a foreclosure for example. If you have settled a “minor” derogatory remark, it shouldn’t affect your credit score too drastically after 2 years.
- You should also evaluate each of these derogatory remarks, and dispute any inaccurate information that may be harming you. If there is no justice behind a claim, dispute it!
- You can dispute inaccurate information being reported by any of the three major credit bureaus by contacting them directly. In the United States, the main Credit Bureaus are Experian, Transunion, and Equifax. They will respond to your dispute within 30 days. If their decision is unfavorable, you can challenge their original determination.
- You could also contact the creditor that is providing the misinformation directly, and have them amend their error.
Conclusion:
Regardless of where you currently stand on your credit journey, I recommend you to sign up for a legitimate credit monitoring platform. I follow an old proverb that says “If you can’t measure it, you can’ manage it. Furthermore, if you can’t manage it, you can’t improve it”. In simple terms, you need data to measure, manage, and improve your situation. The best-educated decisions are data-driven.
A credit monitoring platform will paint a clearer picture. It will tell you where you currently stand in the eyes of lenders. It will also help you track your progress along the way. Additionally, it is very motivating to see progress in anything we do in life! This includes improving our credit score. Similarly, to how people on a diet enjoy stepping on a scale and seeing those extra pounds fall off. You will also gain a “kick” when you see a credit score going higher and higher.
I actually use several different platforms to check my credit. Mainly because different platforms provide different features. Additionally, I sometimes encounter discrepancies between the platforms. This alerts me of a potential problem. Some platforms alert and protect you from shady activity that might be occurring with your credit. For example Identity Theft. Therefore, the more tools to protect yourself, the merrier.
Take action, and sign up for the monitoring system below today! Consider today the first day of your credit improvement life.
My ACTIONABLE Tips:
I invite you to check out myFICO. They are the official consumer division of FICO, which is the company that invented the FICO Credit Score (the industry standard for the last couple of decades). Their credit monitoring features are amazing! You will also get some credit counseling and recommendations. This platform also offers multiple other services. For example they including Identity Theft protection up to $1,000,000. They also provide scores for mortgages, auto loans, etc. They offer 3 different packages you can choose from depending on your specific needs.
The signup process is easy and fast. The platform is very user friendly, and navigating it is self-intuitive. I like this product a lot. You should consider signing up to myFICO even if you currently have a different monitoring system since it is the industry leader.
Click HERE to check out myFICO!