How to build a good credit rating

Introduction to building a good credit rating

Establishing a good credit history has never been as important as it is today.  A record number of people are finding that years of neglecting their credit rating has put them in a compromising position not just when they are in need of decent interest rates when they are ready to buy a home or a car, but when they find out that their neglected credit rating has become a hindrance in determine job eligibility, approval or decline for a decent apartment or reasonable rates on various types of insurance.  Building a good credit rating when you are young is best, but even if you have been around the block once or twice and have bad credit to show for it, it is not too late to change things around and start back on the path to building good credit.

Check your credit report

Having a baseline to judge how well you are doing with your credit can be very helpful.  So the first step that you want to take in building a good credit rating is to check your credit report to see what your creditors or lenders are saying about you.  Lenders contribute important information about how you manage your account to credit bureaus.  There are three main credit bureaus that your creditors have the option of reporting information to.  As the credit bureau gathers all of the information provided by the lenders, they are able to use that information to create a credit rating or a credit score.  This three-digit number is used by lenders to gauge your creditworthiness.

Checking your credit report to ensure that your potential lenders are getting the right information is very important.  You would not want somebody else's information to be mixed in with your report or have negative marks on your credit due to identity theft.   If you find that one or more of these credit bureaus has information that is wrong or perhaps even worse, if you find that credit accounts have been opened in your name without your permission the Federal Trade Commission has information and has established procedures to follow in order to reclaim your good credit standing.

Check that the information shown on your report is accurate.

Sometimes there will be obstacles to building a good credit rating that are outside of your control. Such obstacles include errors on your credit report. Because much of the information on your credit report was put their either by computer or by humans, there are bound to be some errors. What's more is that there could very well be discrepancies between what is on one credit report and what is on another simply because the three main credit bureaus all receive and record credit information independently. As a consumer, you have the right to dispute incorrect entries to your credit report. You do this by sending a letter with details of the errors and proof that the error is in fact valid, to each of the credit bureaus that have the information entered incorrectly. The credit reporting agencies are required by law to investigate your claim that there are errors on your report, and unless you authorize an extension, these errors should be investigated and if found legitimate, corrected in 30-45 days. It is best to check your credit report on a regular basis to ensure that all of the information found therein is correct. It is certainly annoying when you need to use your credit and are faced with delays or even denial of credit because there is an error on your report.

Establish checking and savings accounts

Once you have taken care of ensuring that your credit is correct, you can focus on improving areas that are less-than-optimal. One very simple step that you can take to get yourself on the right financial management track is to open and maintain checking and savings accounts. Lenders look at these accounts as signs of stability. If you are constantly closing out or draining your accounts, a lender is going to be apprehensive about lending you money. This apprehension will be evident in a lower credit rating. If, on the other hand, you are able to show a history of maintaining your accounts and establishing healthy patterns of income and savings, your potential lenders are going to deduce that you will also be responsible in making prompt payments and ensuring that there is enough money in the bank to do so. For those young adults and teens who are looking to start building their credit early, and therefore have not yet established any kind of credit history, be warned that you may need to have someone with an established credit history help you open your first accounts.

Understand the basics of credit scoring

It is difficult to be successful at building a good credit rating if you do not know what goes in to determining the kind of credit rating that you receive. In summary, the basic things that you need to understand about credit scoring are that the two most important factors are that you pay your bills on time and the amount of available credit you actually use.

While making payments on time is easy for some it can be very challenging for others not only to come up with the money needed to fulfill their obligations, but also to simply keep track of everything that is due and when it is due. Setting up automatic payments or reminder systems are excellent options to consider in ensuring that you are never late on a payment. All it takes is a single missed payment to lower your credit score. You also want to make sure that you are not spending money that you do not have by maxing out your credit card accounts. A good rule of thumb is to keep your credit use to less than 30% of your credit limits. Paying your credit card bill off in full every payment period is the best way to keep your finances in check and will help to build a good credit rating.

Use a co-signer or authorized user to benefit from someone else's good credit

It can be difficult to start out in building your credit rating without the help of someone who has already established their credit reputation. This is why so many young people or people with poor credit who are looking to re-build their creditworthiness will have a co-signer help them. Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit score. The downside to this arrangement is that if you default on the loan you have not only hurt your own credit rating, but you will hurt the credit rating of the individual who has co-signed with you. Furthermore, if you default on the loan the co-signer has the responsibility for paying off your debts. There are also risks to you when you consider having a co-signer or authorized user on your account. Not only will your mistakes become their mistakes, but if your co-signer has a questionable credit rating, those same lower ratings will transfer to you as well. This is why you must be very cautious when asking for a co-signer and why your co-signer must fully accept the risks associated with letting you piggyback off of his or her good credit rating. Generally it is because of these risks that authorized users and co-signers are generally also family members who know you well enough to be confident in making the decision of whether or not they should put their own credit rating in your hands.

Credit card do's and don'ts

Building a good credit rating has a great deal to do with how you manage your credit accounts. The one credit account that most people have and that correspondingly gives consumers the most trouble when it comes to managing their debts is a credit card account. It is very easy to get and use a credit card and therefore it is easy to use it irresponsibly. Here are just a few tips that you should remember about properly managing your credit card accounts so that you can build a good credit rating:

• Don't charge more than you can pay off in a month. Not only is it smart to pay off your bill every month so that you do not get in over your head but you will avoid paying interest as well as receive a higher credit score.
• Set up an automatic payment plan with your credit card company to ensure that you never miss your minimum credit card payment.
• Not using your credit account is not going to help much in the building of a good rating. Most lenders prefer to see a history of credit and debt payment. For a credit score to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months.