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Credit scores. If there is a large purchase you want to make in life, more than likely you need great credit. Credit scores are important for things such as if you would like to apply to a line of credit (LOC) – for extra emergency situations – or purchase your first home. I am a huge believer in staying clear of debt and purchasing items only if you can afford them. The downside is that at some point I believe most of my readers will have to tap into some type of loan. For instance, if I were to purchase a home right now then I would have to ask a lender for a loan. I do not look down upon myself for this. It would be a great investment and this way Ryan and myself would be paying money towards our own investment. Instead, we are currently renting (this seems like throwing money away to me but we have no choice at the moment). The most important, invaluable piece of information I can give you is that you need to use credit responsibly. You may be approved for a mortgage which seems way beyond your financial comfort zone. Just because a lender is going to give you a crazy amount of money does not mean you have to accept. Weigh out your options. Shop around. Live within your means.
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How can having good credit benefit me?
- Apply for LOC for extra emergency funds.
- Lower interest rates for the loans you get approved for.
- Have a better change of a mortgage for your homes.
- Have a variety of lenders and interest rates to choose from.
- Qualify for benefits such as cash back programs.
- Better chance for credit card and loan approval.
- Get approved for higher limits (only a benefit if you are a responsible spender).
- Skip the security deposit when getting applying for electricity, gas, cable, or phone bills etc.
- Bragging rights!
How do I build great credit?
To start, great credit scores does not happen over night. They take time and responsibility. If you were able to obtain a great credit score easily then everyone would abuse their rights as a borrower. The truth is that a great credit score is a privilege. A person must borrow and pay back the amount within the written time in the contract. For example, if you were able to obtain your very first credit card I can guarantee your interest rate is probably between 19.9% – 23% or higher in some cases. In most cases, you have a 21 day grace period. This means that if you make a purchase on your card you have 21 days before interest starts to pile on.
Let’s do the math.
You have a credit card with 19.9% interest rate and purchase an item for $100.00. Once the interest rate is applied (after 21 day grace period) you will pay $119.90. If your item was on sale for 20% off, you now paid full price!
It is important to pay these loans off as soon as you can. If lenders can see that you are availing of the loan but paying it back in a timely matter it will help your credit score. The downside is that the better you are the more they want to give you. This seems fine and dandy in the beginning. Unfortunately, life arises and you have a large credit limit then this can lead to maxing out your credit. I.e you lose your job and start paying your mortgage out of your line of credit.
Things you must do to build great credit.
- Only borrow what you can afford.
- Payback loans within the month.
- Stay below 50% of your max amount of credit. For example, if your credit card limit is $1000.00 only use as much as $500 at a time.
- Do not have multiple credit cards and multiple lines of credit. Stick with only one in the beginning.
- Make all payments on time.
- Keep your oldest credit source and let it age.
A credit score can vary from 300-900 depending on the provider. For example, FIC scores and VantageScores are currently using the scoring model 300-850. The greater the number the better. Hense, a larger opportunity for approval on credit applications. If you have a high credit score than you have done everything right in the past. A high credit score may indicate you have a less probability of default on repayment. According to Equifax Canada, here is a general breakdown of what these credit score actually means.
Please note that these definitions may change depending on the provider. This is a guideline only.
300-499 (Very Poor) – Your score needs improvement.
500-574 (Poor) – You should focus on creating a good debt repayment history to prove responsibility.
575-649 (Fair) – You are doing good but it can be better. Lenders will loan to you but you may pay higher interest rates. You may not qualify for loans through all lenders.
650 -749 (Good) – This is great! You have a great chance of receiving great interest rates and will have many lenders to choose from.
750-900 (Excellent) – Excellent work!
If you already have a credit card or other types of loans it is an excellent idea to keep an eye on your credit report. I recommend checking this once a year to see how your credit score is doing. I personally use Equifax once yearly to check on my report. Equifax will give me my credit score, reports of loans and the outstanding balance. It will also show if there are any missed payments, and so much more! It is a reliable and secure site. You are able to analyze your credit report and make goals for the next year. I was able to assess my car payments and how much is left on the loan. Fortunately, I have not missed any payments and have a goal to pay two extra payments this year.
Please note that there is a small fee to obtain your report through any provider. However, it is very beneficial in the long run. Also, check to see if you can claim the cost on your yearly taxes.
If your credit is not where you feel it should be, do not fret. I am soo proud of you for taking the first step in learning how to increase it. The most important thing to take from this is that you should take responsibility for your credit. If you have made poor choices in the past, that is okay. Even if you were not aware of any of this information before, this is also okay! We will start from today and move forward. Alternatively, if your credit is where you feel it should be then I am proud of you too! It took a lot of work to get where you are. This all may seem scary and/or be embarrassing to some at first. Do not run away! Stand up and face your fears. Credit scores can actually be fun…
In conclusion, I hope I have provided an abundance of help for you. I want you to be able to live the life the have dreamed and your credit score is part of that.
You’re worth it.