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How To Build Good Credit

Establishing good credit is a financial necessity. A good credit rating will allow you to make large purchases, acquire a home loan, rent an apartment and buy a car. You will also save thousands of dollars with a lower interest rate because of a high credit score. But where do you begin and how do you maintain good credit? Here are 7 essential ways to build good credit:

Establish credit by obtaining a loan or credit card.

Limit purchases to what can be paid off each month.

Make payments on time every month.

Avoid too many lines of credit.

Do not max out your card.

Check the three major credit bureaus to see if your credit report is correct.

Keep track of all financial documents to prevent identity theft.

Establishing Credit

The first place to start building good credit is to attain a loan or a credit card. It seems rudimentary, but some people think by avoiding credit cards they are somehow being financially sound. True, you won't accumulate debt if you don't have any form of credit. However, unless you can pay cash for a home, car or other large purchase, you're going to need good credit. Even purchases you can afford with cash can be restricted or denied if you don't have credit, like renting an apartment or certain types of insurance.

Within Your Limits

Now that you have a credit card, do not assume it is simply free money you can use without consequence. You should plan ahead and make sure you have enough money, typically in a savings account, to pay off your purchases. You may even earn rewards by buying gas, clothing, or hotel rooms with your credit cards.

Payment History

If you must carry a balance on your credit card, do it wisely. Even a relatively low interest rate for a credit card can still cost you thousands if you accrue a large balance. A $5,000 balance at 18% will cost you approximately $7,000 alone in interest if you only make minimum payments. Nevertheless, making payments on time will reflect well on your credit report.

Lines of Credit

Accumulating too many credit cards will make using them extremely tempting. When

you amass debt and your income stays the same, your debt-to-income ratio suffers. Also, lenders look for new lines of credit when you apply for a loan. If you have recently acquired several credit cards, the lender may consider that risky behavior and deny you for the loan.

Maxing out your Credit Card

Another criterion lenders look for is the total debt you have compared to available credit. Maxing out your credit cards shows you not only have more debt but are in danger of overspending; subsequently, resulting in the inability to repay what you owe and possibly leading you to bankruptcy.

Credit Bureaus

Think of your credit report as a car. Your car needs routine check-ups to make sure it's running properly or it could break down unexpectedly. The same applies to your credit. Allowing even a seemingly trivial mistake or idiosyncrasy to go unexamined on your credit history could cause major problems down the road. The three major credit bureaus you should routinely check are Experian, Equifax, and TransUnion. Checking them frequently can help prevent identity theft.

Keep Yourself Safe

It is estimated that over the last five years identity theft has cost nearly 27 million consumers over $5 billion. Thus, it is imperative you protect your confidential information from falling into the wrong hands. Trying to prove your innocence and expunge the detrimental effects of identity theft can cost a great deal of time and money. Unfortunately in most cases, you are guilty until proven innocent when it comes to credit fraud.

You can control your financial future by building and maintaining good credit. The benefits of a good credit score can mean you save thousands of dollars on important purchases. However, if you suffer from exceedingly high debt, you might consider credit debt consolidation or debt settlement. Waiting even another month can cause your plummeting finances to crash. Due diligence and discipline are required to find and implement a successful financial plan, but a debt free life is well worth the effort.

Author Bio: Scott Sumerford has several years of experience working in the financial industry and has written a myriad of articles on various financial matters. He graduated from the University of Texas at Arlington where he worked as a writing center tutor and contributed to the university's newspaper, The Shorthorn. View more articles

Category: Credit

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