What Is The Fastest Way To Build Credit?
Having a good credit score is very important if you've got plans to buy a car or house. Your credit standing determines the likelihood of getting approval for a loan and the interest rate you'll pay. In other words, you need good credit to get credit. If you're someone who's looking to improve your credit, there are a number of things you can do, but the best method is one that we should all be doing every single day and week. What's the fastest way to build credit? Simple -- pay your bills on time.
[Related – 7 Tips On Improving Your Credit Score]
You And FICO
Your FICO score (short for Fair Isaac Corporation) can range anywhere from 300 to 850. It's a numeric scale calculated by the [|]three credit bureaus[:|] based on your good (or bad) spending and savings history. You'll need to get your own personal number in the low-to-mid 700 range to be considered for the best loans. A competitive score can be hard to come by, but if you're timely in how you pay your expenses, like your phone bill, mortgage, car payment or utilities, it can go a long way in raising your credit score.
Did you know that 35 percent of your FICO credit ranking score is your payment history? That means over one-third of your overall credit score is impacted by how timely you are about paying outstanding debts and bills.
How Do I Pay My Bills On Time?
Before learning the answer to that question, you should figure out what your [|]debt-to-credit ratio[:|] is -- it's the difference between your credit limit and how close you are to that limit in expenses. To calculate your own ratio, divide the total debt you currently owe by your total available credit.
For instance, if you have $2,000 in debt charged to your credit card, and your credit limit is $4,000, your entire debt load is half of your total credit.
$2,000/$4,000 = 50% debt-to-credit ratio
If you have $4,000 in debt and a $4,000 credit limit, then naturally your debt load will be 100 percent. It's not advisable to max out your credit -- in fact, money expert Liz Weston and others concur that you shouldn't ever use more than 30 percent of your credit availability.
So, with that in mind, [|]paying your bills on time[:|] not only reduces the amount of debt you have in relation to your credit, it also directly improves your credit score. If you're behind on paying your bills, there are a few simple steps to get them paid faster than you can say "debt-to-credit ratio."
According to debt expert Steve Bucci:
- Pay bills the same day you receive them. Waiting until the last minute to pay your bills is almost as bad as not paying at all. If you're the disorganized type, or prone to sticking paper bills in piles or in desk drawers, pay them as soon as they come in the mail. Write a check then and there, and mail it out the next day to ensure early delivery. Better yet, opt into paperless delivery with your utilities, phone or cable provider, and pay your bill online -- the payment is registered immediately and you even save on postage and time.
- Mark due dates on the calendar. Between rent/mortgage, electric, gas, cable, cellphone, car payment, car insurance and, lastly, the credit card bill, you might have six or eight bills per month with six or eight different due dates. Keeping track of each one is difficult enough; losing track of just one can mean a late payment and a blemished credit score. Make note of your due dates on a calendar of your choice -- you might prefer a print calendar, your computer desktop organizer or the datebook in your cellphone. Ensure that the same dates are marked each month and reoccurring, and make it a habit.
- Change your due dates. If it's easier for you to pay all your bills on the same date each month, make it happen. Contact your creditors and change the due date of your bill to one of your choice. This way, says Bucci, you won't need to worry about multiple due dates. However, always make sure to keep reading your monthly statements in case any due dates have suddenly changed.
[Related – How To Rebuild Bad Credit]
Don't Be Delinquent
It can be easy to take paying our expenses for granted; a check is drafted and mailed away, transacted between some anonymous creditor we don't ever see. But the effects of delinquent payments are very real and very harsh. If you've had a [|]car repossessed[:|], faced foreclosure, or your electricity shut off, you know exactly what that means, and this article is meant for you.
[Related – 3 Ways To Avoid Home Foreclosure]
Non-payment of your bills can leave an indelible scar on your credit score and history in the long run. When bills go unpaid for several months, the phone company or auto lender may take their efforts to the next step and file a claim with a collection agency. If the problem has reached a court of law, a collection agent may have the authority to garnish your wages, claim your property or place a lien on things like your house, even if you already own the property.
Thankfully, more people are waking up to what non-payment of bills can do, and delinquencies -- payments overdue 30 days or more -- are down nationwide.
Reuters reported that in 11 consumer loan categories tracked by the American Bankers Association (ABA), timely repayment of bills was up in the fourth quarter of 2011 -- a first in eight years that Americans are keeping up with their expenses.
The ABA, which tracks payment of credit cards, auto loans, home equities and other types of credit, found that a broad delinquency rate tracking eight different types of loans dropped at the end of the year, noted Reuters, from 2.49 percent to 2.59 percent, the lowest in four years. Credit card and home equity delinquencies also decreased. Ezra Becker, vice president of TransUnion, was quoted by USA Today in 2011 as saying that because credit is harder to get, and that card companies exercise more scrutiny on their customers, card holders are less likely to default.
TransUnion, said the USA Today report, had found that credit card repayment is on the rise; consumers made $72 billion more in credit card payments between 2009-2010 than they did five years earlier, when those added repayments totaled only $2.1 billion.
ABA officials reason that a recovering economy, lower unemployment rate and re-employment of new workers allow people to pay off their bills easier. However, the Reuters story said that rising gas prices, according to the ABA, have subsequently made it difficult for people to pay their bills on time, since extra gas money could have been allocated for other expenses.
Paul Sisolak is a contributor to GoBankingRates.com, your source for the best CD rates, savings account rates, personal finance news and more.