How to build a credit score from the ground up

Living without debt is great – many people prefer that, especially now during these difficult times. However, if you plan on buying a house or a car in the near future, you’re going to need a good credit score if you’ll need credit to finance those goals. It’s important for lenders to see a history of how you have successfully managed debt. So how do you start building your credit rating from the ground up? Here are some ways to get you started.

  1. Pay your rent, water and lights, on time
    While your water and light accounts don’t show on your credit report, your service providers will turn your account over to collection companies when you default on making payments. This will impact negatively on your credit rating. To avoid this, pay your bills on time. Having a good history of timely payments will help you to establish a good credit record.
  1. Open a bank account
    Managing your bank account well is a good indicator of your financial responsibility, which goes a long way in establishing a good credit history. If there’s an overdraft facility, you will benefit from activating that too, within limits. A good rule of thumb is to use no more than 25% of the available overdraft limit and pay what you owe quickly.
  1. Get a credit card
    One of the easiest ways to build your credit history is by getting a credit card or even a retail store account card. Then, use this card or account to make small purchases and repay the money at the end of the month. Remember to pay it back in a timely manner and keep your credit balance below 35% of your credit limit.
  1. Go slow with credit applications
    While you need credit to build credit, it’s important to take it slow. Having too many credit applications in a short period of time might do more harm than good for your credit building efforts. This shows lenders that you’re desperate and could be susceptible to getting in way over your head with debt.
  1. Monitor your credit report
    Your credit report isn’t only useful for checking your credit score. It can be the first indicator of identity fraud that has taken place using your personal information. By regularly going through it, you can pick up signs of fraud, incorrect information or judgments against you, and work on fixing these. The quicker you pick these up, the quicker they can be resolved.

While these steps can help to build a good credit rating from the ground up, you need to adopt some good financial habits to keep your score from dropping. These habits include:

  1. Never miss your payments.
  2. Avoid making late payments on your credit accounts.
  3. Don’t use too much of the credit available on your credit accounts.
  4. Don’t have too much debt (should not be higher than your income).

Building up your credit score will take time. By practising sound financial habits, you’ll reap the benefits in the future when you need credit most.

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