Having good credit and borrowing capacity are critical things for when you want to make a big purchase like a car or home. Those with good credit can qualify for better interest rates, which can make a huge difference when it comes to monthly payments. There are seven key things to focus on to build your credit and increase your borrowing capacity
1. Pay bills on time
Paying each of your bills on time is an easy and effective way to boost your credit. Lenders want to see that you reliably pay your bills and are responsible with your money. How you have paid your bills in the past is a good way of determining how you will pay them in the future.
You should pay each of your bills on time each month as agreed. Paying late will drop your credit score and not paying at all can be very detrimental. This includes all bills not limited to auto loans, student loans, utilities, rent, and insurance. You don't want anything to go to collections. It can be a good idea to set your bills up on autopay so no due dates are ever missed.
2. Keep balances low on credit cards and other debt
Your creditworthiness is highly impacted by your utilization ratio. Lenders want to see that you have a low amount of debt in relation to how much credit you have available to you. Someone maxing out their credit cards, for example, is much riskier to lend money to than someone that is keeping their utilization rate at a low level.
If you have $20,000 in credit available to you on your credit cards, for example, lenders want to see you using $6,000 of this or less. Ideally, you keep your use below 10% to achieve the best credit score. Lenders use the statement balances on your debt to determine your utilization rate.
3. Only apply for additional credit when you need it
If you are opening up a lot of accounts in a short period of time, this won't look good to lenders. Only apply for things like credit cards when you need them to keep your credit score high. Every time you ask for a loan or credit card it creates a hard inquiry on your credit record, an excessive amount of which discourages lenders from extending additional credit.
4. Never close unused credit cards
Closing a credit card reduces the amount of credit you have access to, potentially increasing your utilization rate. If you're not using a card, you should stick it in a secure place but not cancel it. It only makes sense to close a card when it is costing you annual fees and you have low existing balances so your utilization rate doesn't shoot up.
5. If there are inaccuracies on your credit reports than dispute them
If you see an inaccuracy on one of your credit reports, dispute it. Inaccurate information can drag down your credit so it is important to dispute it right away.
6. Never co-sign on a loan
When you co-sign on somebody else's loan that makes you just as responsible for paying the debt back as they are. The moment they start missing payments you will be hearing from the lender. Co-signing is just way too risky. The very fact that someone needs a co-signer to qualify for a loan should set off alarm bells and prevent you from agreeing to be a co-signer.
7. Ask for credit increases
You should occasionally ask your credit card companies to increase your limit. This helps you in two ways. First, it increases your borrowing capacity in case you need to make a large purchase. Second, it makes it easier to keep your utilization rate below 30%, or ideally 10%.
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