|
credit card
Hey im 19 and i've had a credit card for a few months now and have always paid off my bill in full each month. I mainly got the card so i could build my credit. I was just curious how long do you have to have a credit card before you get "good credit" like does it take only a few transactions or a couple months? How does it work? Thanks in advance!
[ ]
Want to answer more questions in the Work & School category?
Maybe give some free advice about: Personal Finance?
I posted this on a credit question earlier. Copypasting
Additionally, this website is an excellent summary of everything you need to know about your actual credit score. It's an interesting and relatively short read. Very informative.
[Link](Mouse over link to see full location)
Here's an excerpt
35% of your Credit Score is devoted to Payment History. This would include missed payments, collections, bankruptcies and the like. The older the information the less of an impact on your overall score.
30% of your Credit Score is based on Utilization. This is the amount of credit you have in used as compared to your available credit. The recommendations point to less than 10% of your available credit be utilized.
15% of your Credit Score is impacted by your Credit History. Effectively how long you’ve had accounts open and obviously takes some time to build.
10% of your Credit Score is based on Inquiries. If you apply for various forms of credit and then don’t get that credit it will impact you negatively. Checking your own credit does not impact this number.
10% of your Credit Score is determined by Types of Credit. This would be different forms of credit such as mortgages, auto loans, revolving credit and installments.
Is something Missing? You’ll note that there is no consideration for your actual income in this model. Interesting to say the least.
________________________________________________________________
First, your credit rating is a reflection of how reliably people who extend credit can make money off of you.
Making payments consistently means they can get their money out of you. By the same logic, never paying interest can actually hurt your credit somewhat. If you get a credit card and pay it off every month, you'll be responsible but companies will also be aware that they are making little money off of you.
This can affect you in trying to get larger loans at good rates (like a mortgage, or car payments) as you'll likely get a higher interest rate if they know you'll try to avoid as much of it as possible.
You can build credit in many ways.
First, open an account at a local credit union. Savings and checking. You want to find a good bank that's available to you locally which you can build credit and business relationships specifically. Credit unions are more strict in their rules because they're less about profit and screwing you over with overdraft fees.
Check into any credit unions near you. Google for reviews online.
Once you've got an account open, take out a small loan. Like 200-400 dollars. Plan to pay it back in six months. Use it to buy something you want, eat the interest, and pay it back exactly as you are scheduled to over time.
Activities like this prove that you both are a reliable borrower and that you are willing to pay interest to get what you want. The things companies who extend credit want to see. If you decide to say, buy a car in the near future, you might have the money to buy it outright. Instead, go back to your specific bank and take out another loan for the car, to be payed back over a short period of time. Short for credit, so say six months or a year. You don't have to do the whole value if you don't want. Say you paid for two of a ten thousand dollar car with a loan.
The bottom line here, is that you have to pay interest to really build good credit. That's what they want to see, and that's what you have to give them.
For credit cards, some general guidelines.
Start out with a 500, 750, or 1000 dollar credit limit. Generally I'd say you shouldn't have a credit limit higher than one months salary on a card in your name unless you're making six figures, but that's my personal opinion and not professional advice.
Starting low helps you make sure you can't use it too much. Stick to your limits, don't go over them. Proves you have restraint. Use the card to pay for things like groceries. Regular expenses you know you can cover. Let a balance carry over [i]every month[/i]. Not a big one, pick a number you know you can reliably pay off on short notice. Might be fifty bucks a month, might be two hundred. Always, always pay more than the minimum payment, I'd say you should always make sure you can pay fifty bucks on your card per month, bare minimum.
You don't want a ton of credit cards. Two at most in your name, any more and people start wondering why you need that many cards. One to start, the second should be because you actually need the line of credit or want to have a second card for specific purposes you won't use your main for. An example, I had a friend who was into art and used his second card exclusively for art expenses. He sold paintings, so it made accounting easy and let him write off most of his purchases at the end of the year as business expenses. People pulling your credit report can see how many lines of credit you have. Seven credit cards at 2000 a piece looks like you're not reliable enough to get the credit limits you need from one or two institutions, even if you really are.
The two at most rule is obviously not needed if you've got alot of specific applications for them you want to keep separate, but I can't imagine needing more than probably three or four personal credit cards.
The key to credit is demonstrating that a company will make money off of you by lending to you without letting yourself be screwed over by interest payments. Responsible credit builds slowly, but once it's built you have a significant credit history behind you showing years of reliability.
Last, a word on mortgages. There may well be other types of credit which work like this (car financing strikes me as a possibility) but specifically I know an interesting fact about mortgages. Often times on large borrows you pay disproportionate amounts of interest up front.
The loan you take is called the "principal". The first payment on the mortgage might be mostly or all interest. You pay that first, then pay on the principal. Those will be the loan terms that you have to meet in order to get it. Often times it's something of a sliding scale. The first payment could be all interest, while a year in you're paying a percent on the interest and a percent on the actual principal. By the end, most of the time you're done with the interest or they might even just straight line it so you're paying 5% and 95% and they switch places gradually from the start of the loan to the end of payments.
You can do what is called "paying on the back side of the loan". Making payments above and over the required monthly payments can be applied directly to the principal. In fact, it's recommended that you make double payments (at least) for the first year of a mortgage, because it can cut as much as five years of interest off the back side of the loan you took out.
Some places might limit the amount you can pay on the principal in the loan contract to cover their interest and protect their profits. Even if they don't, paying a decent to big sized mortgage loan off in an overly quick manner will build credit more slowly. Same as with the credit cards, not letting companies collect their interest can hurt you if you're really consistent about it. Always, always read your loan terms thoroughly before you sign. Goes without saying almost, but there's alot in there you can miss.
]
More Questions: |