Good credit is very important in modern American society. Credit scores can affect not only a person’s ability to obtain credit cards and receive approval for financing for appliances, cars, or homes, but credit scores are also used to determine whether a person is qualified to rent an apartment, house, or car. Credit scores are even used by utility companies to determine whether a deposit will be required and by auto insurance companies to determine auto insurance premium rates. Building credit or rebuilding credit is, therefore, critical to almost every facet of American life. Here are five tips for building or rebuilding credit:
Check Credit Scores
There are three major credit reporting companies and each has a credit score for almost every American adult. Credit scores range from below 550, which means bad credit, to above 750, which means excellent credit. A perfect credit score is 850 and, according to the credit scoring company FICO, less than 1% of Americans have it. Knowing the credit score, as well as the negative entries in a credit report that are dragging the credit score down, places a person in position to repair their credit.
Pay Bills in Good Standing
If bills have gone to collections, make arrangements to pay those bills off. However, do not over-commit to collections agencies because that will risk defaulting on more bills. Rather, make sure all bills that are in good standing remain in good standing. For example, if the cable bill has gone to collections, make sure the gas bill and electricity bill are paid on time before settling with the cable bill collector. One overdue bill is bad; three is far worse. Moreover, paying bills that are in good standing on time helps create a pattern of good payments that can have a positive effect on the overall credit score even while overdue bills and bills that have gone to collections are resolved.
Make a Budget
Whether building credit or rebuilding credit, everyone can benefit from making a budget and living within it. Making and living with a budget requires realism in both income and expenses and discipline to stick with it. However, the goal of this budget is to avoid debt because unpaid debt kills a credit score. Having a budget ensures that everything is paid for and, thus, no debt should be incurred as long as the budget is adhered to.
Look Into Lease-Purchase Programs for Large Purchases
Sometimes life gets in the way of the best plans. For example, when the refrigerator dies, most people would be unable to withstand the $600 expense of replacing it. Options for financing for appliances are limited for those who have no credit or bad credit. For people with bad credit financing a large purchase, such as a refrigerator, is difficult. Most people with bad credit have no credit cards or low limit credit cards and are unable to secure a personal loan. For such buyers, flexible lease-purchase programs may not only allow the replacement of the refrigerator but may also build credit as payments are made on time. When using lease-purchase programs for financing for appliances, the leasing company buys the appliance from the seller, then leases it to the lessor. As long as the lessor makes lease payments on time, he or she can keep the refrigerator and, just as importantly, his or her on-time payments are reported to credit reporting agencies and go toward building credit.
Building or rebuilding credit is a long process and takes time. Negative entries in a credit report can remain in the credit report for 7 or more years. Moreover, good entries, even when more recent, may not be sufficient to raise a score until they establish a pattern of good payment history covering a number of years.
In sum, building or rebuilding credit is possible. Finding out the credit score gives a starting point. Having a budget to avoid debt can prevent the credit score from getting worse. Paying bills that are in good standing on time and using lease-purchase programs to finance large purchases, such as financing for appliances, can help build good credit. Above all else, remaining patient and maintaining the plan over a number of years can eventually yield good results.