Rebuild your credit

How to Build Your Credit

Build Credit: The Three Keys to Creating Good Debt

At first glance, the words “good” and “debt” don’t seem to be a symbiotic match, but there are indeed some instances where creating debt does generate a surplus of income or personal wealth. There are certain schools of thought that agree if a debt is going to increase your potential for income, it could be a good opportunity. However, many people don’t stop and think before they agree to take on a new financial responsibility. If you’re currently considering obtaining a debt to help get you through a specific situation you may want to keep these following advice in mind.

Always Question Your Motives
A good rule of thumb to follow when considering creating a debt is to ask yourself the following question.

“How is borrowing this money going to help me make money or get me out of debt?”

If you’re using credit to do your basic living, you’re not helping yourself pay down your debt, or even create new income. You may feel temporarily relieved, but in actuality you’re increasing your debt and just pushing off the inevitable need to pay until another day. If you approach debt from the perspective of using it help you create wealth, you’ll have a much healthier personal financial situation.

So, in short, if your motive is to create more debt, it’s not a good idea to keep digging yourself into a hole. However, if you are using the debt to increase your opportunities to generate more or new income, it may be the right move for you.

Determine What Is A Good Debt
An easy way to decide what a good debt for you would be is to determine to what degree that debt will increase your wellbeing or expand your potential financial growth. For some ideas, consider these five scenarios for creating good debt:

  • Take out a loan to start a side business or to expand your current business. However, you’ll want to get the loan in your business’s name as soon as possible so that your liabilities are divided.
  • Get a college education.
  • Take a class or learn a skill that will help you be more employable. This can be anything from going to therapy to becoming a better communicator or even taking a sewing class so that you can sell your creations on Etsy.
  • Consider getting a consolidation loan with lower interest rates.
  • Buying a home or some other investment that is going to increase in value is also good debt, albeit with a bit of risk. Before you buy a home, you have to think worst-case-scenario: If this home never increases in value, can I always afford the payment?

Investing in Your Family
It isn’t a traditional approach to personal finance or debt to consider investing in your family, however, while it may not increase your revenue stream directly, it does increase the overall quality of your life and the future of your family. The main factor to consider before you agree to the debt is to honestly answer, “Can you afford to pay it back?”

If you don’t have solid proof that you can pay it back, it would not be financial prudent to consider it a good debt. The key here is establishing solid proof that you can pay it off. Many people have a feeling they can pay it back, but don’t run the numbers to determine whether that feeling is based on fact. To establish proof, you need to know exactly what you need to live on each month and exactly what income is coming in. If you have enough left over to cover the new debt comfortably, than it might be something of value to consider. Some examples of investing in your family include:

  • Investing in your family’s future by sending your kids to college.
  • Hiring a tutor for your children.
  • Sending your overworked spouse on a vacation to relive their stress.
  • Buying a home that your family is going to live in forever might be good debt even if it’s a seller’s market and the home is likely to lose value.

When it comes right down to do it, life is a balancing act. Some people preach that you should never use credit unless it can increase your income. All other debt is bad debt. That isn’t always the case, and you can’t live your life by absolutes. There are some times in life when you will need to use credit and pay interest for things that will increase you or your family’s well-being. The trick is in making educated financial decisions and balancing the risk of the debt versus the opportunities it will create. 

Building Credit from No Credit

If you’ve never had a credit card or a loan, your credit history is a blank slate. Your credit history, as documented on yourcredit report, is a record of how responsibly you’ve repaid money you’ve borrowed.

Creditors and lenders use your credit history to make decisions about whether to give you a credit card or extend a loan. However, if you have no credit history, there’s no record of how you might manage debt. As a result, many creditors and lenders won’t lend you money.

It may seem like an impossible loop, but there are ways to build credit when you have no credit. Here’s how in six easy steps:

1. Get a secured credit card. 

A secured credit card is just like a “regular,” or unsecured credit card, only you are required to put down a security deposit – typically $300 to $500 – to provide assurance to the creditor that you will repay your debt. Your credit limit is often the amount of your security deposit, or a percentage thereof.

Many people confuse a secured credit card with a debit card, however the two are very different. First, banks do not report debit card usage to the credit bureaus, as a debit card is not an extension of credit. A debit card is merely a convenient way to access the funds in your bank account.

Creditors, on the other hand, do typically report secured credit card activity to the credit bureaus, as a secured credit card is an extension of credit. Your purchases are not deducted from your security deposit. Rather, each time you charge something, you are effectively borrowing money from the credit card company and are obligated to repay that debt. As a result, how responsibly you use a secured credit card will affect your credit score – both positively and negatively.

2. Only charge what you can afford to pay off in full. 

Building credit means consistently demonstrating your ability to pay back any money you borrow. Your goal is to prove to creditors and lenders that you can responsibly manage debt. That’s why it’s smart to start small – Only charge purchases that you can afford to pay off in full every month.

Unfortunately, it’s not enough to open a credit card – secured or otherwise – and sit on it. If you don’t use your credit card, you’re not demonstrating anything. Use your card at least once a month for small purchases like inexpensive meals, gasoline and drug store essentials. Try to not charge more than 50 percent of your credit limit in a given month however, as that can take a toll on your credit score.

3. Pay on time every month. 

The most important thing you can do to build and maintain a good credit score is paying all of your bills and debt obligations on time every month. Even one late payment can significantly damage your credit score, especially early on.

4. Avoid applying for numerous accounts. 

Each time you apply for a credit card or loan, your credit score takes a small hit. And there’s no point to chipping away at acredit score you’re trying to build up, especially when you haven’t yet demonstrated that you can handle just one credit card. Instead, use that energy to prove to yourself that you can keep the balance low on one credit card and pay the bill on time every month.

5. Check your progress by checking your credit report and score. 

After six months of timely credit card payments, check your status by viewing your credit report and score. Pay special attention to what’s on your credit report and any positive or negative factors listed, so you have a better idea of what you need to work on next. Also make sure to take a look at your credit score – It will help you make sense of your credit report and give you an idea of how well you’re doing.

6. After a year, apply for an unsecured credit card. 

Twelve months of timely payments should be enough to show your credit card company that you can responsibly manage debt. Now’s the time to give your creditor a call to see if you can make the switch from a secured credit card to an unsecured credit card. An unsecured card frees you from your security deposit obligation, will likely carry a higher credit limit and may offer useful perks like reward points.

The key to building credit is patience. Remember that having a good credit score is like having the world’s best coupon book for all the biggest financial transactions in your life. It may take time to establish good credit, but once you do, you’ll reap the benefits of big savings.

The 2011 Savings Plan 
 
Building savings is your best defense against unexpected events. It can help you prepare for expenses that vary from month to month, but it can also help you accomplish your long-term financial goals, whatever they may be. This article is not just for people who are starting their savings plan – there are a lot of good suggestions for those who want to give their plan a boost.  
 
There are three basic tiers of a successful savings plan. 
 
Money for Periodic Expenses: The first thing you need to do when designing a successful savings plan is to make sure your budget is in order. Expenses that vary from month to month can be a budget killer. For example, your utility costs probably change significantly from one season to the next. You may also have a number of family birthdays bunched together that you need to buy gifts for. By averaging these items over the course of a year and setting aside an appropriate amount of money to handle them, you will bring a measure of predictability to your budget. This should allow you to determine exactly how much you can put toward the next two tiers of your savings plan. 
 

The Emergency Fund: Once you’ve set aside money for things you know and expect, it’s time to prepare for the unexpected. The conventional wisdom is to create an emergency fund that covers at least 6 months’ worth of expenses. Many financial experts, however, have been encouraging people to create larger funds, covering up to 10 months of expenses. The reason is - you guessed it - the economy. It’s taking longer for the unemployed to find new jobs, in some states the average is approaching a year. To create an adequate emergency fund, you’ll have to identify essential expenses – those you would need to survive (food, shelter, etc.) and determine those budget items that would be reduced or eliminated if an emergency occurred.

 
Building toward the future: It will probably take a long time to finish building your emergency fund, but once you’ve done so, you can use the money you were contributing every month to achieve your short- and long-term goals. You may want to save for a new car, a vacation, child’s tuition, retirement, or some other investment product. Chances are, you’ll have multiple goals, but to achieve them you must determine how much you’ll need to accomplish your short-term goal (the vacation) without hindering the long-term goal (retirement). You must prioritize your goals, keeping within your budget, to give yourself the best chance of success.

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