It was now possible to buy and own material goods, even if you do not have ready cash to pay for it! After a glut of credit and a mountain of bad debts, it was only natural that lenders became more cautious and savvy about lending money to customers, which is where the concept of a "credit score" or "credit history" comes in.
In very simple terms, your credit history is the sum total of your borrowing and repayment history, reduced to a numerical value which is called a "credit score." The data is built up over a period of time and your score can change from time to time, based upon the latest patterns in your credit behavior.
Today, your credit history not only determines whether you are eligible for new loans, credit cards or other financial products, it also plays an important role when you seek new jobs, low interest rates or even insurance policies, even if you don't borrow any money to fund the policy. This article highlights some steps about how to build a good credit history.
- Check your credit score. If you've never borrowed money before, you can skip this step! Otherwise, the first thing you need to do is check your current/latest credit score. In the U.S., there are 3 operating credit bureaus which track credit histories. Most banks and financial institutions use any or all of these 3 bureaus to find out your latest credit score, when you apply for a loan, credit card or any other financial product. Check out your latest credit history for free at annualcreditreport.com.
- Stay current with your repayments. This is the easiest and simplest way to ensure you have a good credit score and history. If you have a loan – housing, auto or personal – make sure you make your monthly repayments on time, every time! If you own any credit card(s), pay the total monthly outstanding amount, by or before the due date. Most credit card companies provide a revolving payment facility (where you make a minimum payment of at least 5%), but using this option means interest gets added on the unpaid balance and eventually, the total debt on your credit card gets inflated. Therefore, stick with making payments for the full balance, month-to-month.
- Have low exposure or utilization. In addition to timely repayments, your credit score also takes into account the extent to which you've utilized the credit line/limit. A lower exposure or utilization means a higher credit score and vice versa! Hence, never try and max out the limits on your credit cards. Most people tend to go on a spending spree, taking advantage of the limit and then settle down to making minimum monthly repayments because they cannot afford to pay more! The basic rule of thumb is buy only what you can afford, as if you were paying cash at the time of purchase!
Keep track of your spending habits and be prompt with your repayments! Another piece of advice is to check your credit report at least once a year, to be sure that what is being reported is accurate and actually refers to your records.