People of all income levels are capable of raising their credit scores to “excellent” levels (740 or higher on the FICO scale).
I have evidence to back up my claim. Not very long ago, I worked as a bank teller for the duration of my undergraduate career and for nearly two years following graduation, earning a total of $15,000 to $24,000. During that time, I raised my FICO score from a 0 to a solid 700.
Moreover, I have some more encouraging news to share. To get that coveted “great” credit score, you don’t need to take out a bunch of loans, carry about a huge credit card bill, or rely on a cosigner.
So, how can one go from having no credit to being a financial savior? Keeping in mind the five main components that make up a FICO score, and abiding by a few basic guidelines:
Using a credit card to establish credit.
To establish credit, you need not submit numerous loan applications that will ultimately go nowhere. At age 18, I applied for my first credit card, a student credit card, which was quite simple to be approved for (even without a credit history) because I was working and had a stable income.
Applying for a secured credit card is another way to get your credit history off the ground, especially if you have had credit problems in the past. A secured credit card is one that requires an initial deposit before use and limits your spending to that amount.
Secured credit cards have the highest approval rates since the issuing bank carries less risk when you make a deposit to cover potential repayment default. Your best bet for building excellent credit is to use a secured credit card for six months to a year, at which point you can apply for a standard credit card.
Maintain a spotless credit record.
Although my annual income was less than $20,000 at the time, I made it a point to pay off my credit card balance in full and on time every month. You should do the same if you value high credit scores. Considering that the length of your credit history only factors for 15% of your FICO score and your payment history accounts for 35%, this guideline takes on further significance.
In addition, your repayment history accounts for half of your FICO score, therefore it’s important to check your credit report frequently for errors or fraudulent activity from lenders. AnnualCreditReport.com allows you to view your credit report for free once a year.
Don’t carry a balance on your credit cards.
I never carried a balance on my credit cards since I always paid the whole amount due each month. I could have run up a balance because my card allowed for up to $1,000 in purchases, but I didn’t.
When it comes to your credit, why is having a balance? Not only does carrying a balance put you in a position to accrue interest, but it also increases your credit utilization ratio.
If you have a lot of debt in relation to your available credit, your credit utilization ratio will be high. Also, doing that will lower your credit score.
Try to limit your total debt to a minimal if you want your credit usage ratio, which is 30% of your FICO score, to be as low as feasible. You should also check out…
Don’t close your credit card accounts!
Never closing a credit card, even if I don’t use it, helps keep my credit utilization ratio low. Why? Because your credit utilization ratio — and credit score — will be healthier if your total credit limit is larger and your total debt is lower.
Now, let’s pretend I’ve been responsible and opened three credit cards, each with a $1,000 limit, during the past few years. I have a total credit limit of $3,000, assuming I don’t have any additional loans or credit lines. That’s a 33% credit use ratio ($1,000 in debt/$3,000 credit limit). If I were to cancel one of the cards, my available credit would be reduced to $2,000, and my credit utilization ratio would rise to a less favorable 50% (or $1,000 in debt divided by $2,000 available credit).
Keeping your credit card accounts active helps your credit utilization ratio since it prevents your overall credit limit from being reduced. All of it bodes well for your credit score.
Even if it takes time, it is possible to build outstanding credit. Even people with a low starting salary can eventually boast to lenders that they have a FICO score of 740 or over by starting small, paying lenders on time (and every time! ), keeping debts low, and maintaining open credit card accounts.