How to Build Credit

If you’re planning on ever buying a car, buying a house, or getting any sort of substantial loan, you need to have a credit score, and more often than not, it needs to be a good one. While building credit might seem like a catch-22 — you need a credit card to build credit but can’t get a credit card unless you have credit — there are ways for anyone at any stage in life to begin to build their credit score. So how do you build a credit score and, more importantly, how do you make sure that yours is good? Check out these tips for building a credit score and keeping it where you want it.

  • Alistair McCreath Credit

    Establishing credit is the first step in building credit history.

    Establish credit. There are several ways you can go about doing so, and some of them don’t involve credit cards. You can apply for a secured credit card which requires an upfront payment as collateral if you miss a payment; you can apply for a credit-building loan, which, as the name says, builds credit for the borrower; you can get a cosigner for a loan or an unsecured credit card; you can become authorized to use someone else’s credit card which can help you build credit without bearing the financial burden alone; or you can look into getting credit for paying your rent through rent-reporting services. Each of these methods come with their own caveats and stipulations, so make sure you’re well-read on the matter before choosing one for yourself.

  • Enforce good payment habits. These include paying all of your bills on time, including both credit cards and utility payments. If your bills go unpaid and sold to a collection agency, your credit will be seriously hurt. Consistently paying bills on time — especially credit card bills — is one of the best and easiest ways to improve a bad credit score or build a new one.
  • Keep a low credit card debt. The best practice when it comes to credit cards — especially concerning your credit score — is to pay off your balance in full each month. This eliminates additional interest that will accrue with unpaid monthly balances. However, if you are unable to do so, it’s important to never let your debt balance (the amount you owe) exceed 30% of your credit limit (the amount you’re allotted to spend). So, if you have a $1,000 credit limit, keep your debt balance under $300.
  • Check out your credit report. Once a year you’re entitled to a free credit report from each of the three major bureaus: Experian, Equifax, and TransUnion. Your credit score will fall somewhere in the range of 350-850, with higher numbers being better. If you’re just beginning to build your credit, it’s important to take a look at your current report and make sure that there are no mistakes and all information is accurate. Mistakes on the report will impact your credit score.

Now is the best time to start building your credit, and if you have children, it’s a good idea to be prepared to help them begin building credit when the time comes. It’s never too late to start building your credit, but it’s never too early, either.

7 Better Budgeting Tips

Budgeting your money usually ends up like going on a diet; you start it with the best intentions to follow it through, but two weeks in and you’re back to your old habits. So how do you make a budget and stick to it? How do you ensure that you follow through with your financial plan? The best way to budget is to make a plan and stick to it. Now, this is definitely easier said than done, so try using these tips to help you make a budget that will be easy to follow.

  1. Identify why you’re budgeting. If you’re choosing to budget because someone told you it was a good idea, you probably won’t stick to your plan. The reason to budget is that you want to make sure that you’re spending less than you earn. Don’t think of it as a solution to your financial problems; think of it as a roadmap to help guide you adapt your spending habits to keep you from financial problems in the future.
  2. Track your spending. Although it’s not the primary goal of budgeting, if you track every penny that you spend for a week it will open your eyes to all of the little expenditures and how quickly they add up over time. It may also help you identify areas of spending which have gone unnoticed.
  3. Start from the beginning. If you’ve never built a budget before, start with your basic monthly expenditures; bills, gas, and food. Then ask yourself how much you want to save each month, and how much money you want to have leftover to spend. Once you have these building blocks, the foundation will allow you to build a more specific budget.
  4. Alistair McCreath Budget

    Set your savings aside before you spend any money each paycheck.

    Save before you spend. Instead of waiting until the end of the month and saving what’s left over, set aside the money you want to save at the very beginning of the month, and then spend what’s left so you ensure that money is going into your savings.

  5. Use different accounts. If having a lump sum of money sitting in your bank account is often all-too-tempting, try using a different account for each category of your spending. Separate the money for bills, savings, and spending so that you can only see the money that is available for you to spend.
  6. Give yourself some wiggle room. If you mess up and go out of budget, don’t beat yourself up. Mistakes happen. The best way to avoid them is to give yourself some wiggle room. Overestimate when it comes to bills, and set aside a little money for slip-ups so that if you spend a little extra, you don’t go over budget.
  7. Make sure your budget is adaptable. Odds are that you won’t make the perfect budget on your first try. Make sure that you can tweak it and change it if need be. You also won’t have the same exact bills to pay forever, either. If your budget foundation is good, you can use your old budget model to build yourself a new one to incorporate new or changed expenditures.

If you want to really keep scrutinous track of your spending, there are dozens of budget planning websites out there that can assist you with the process. Find one that works for you.

6 Things to Consider Before Refinancing

Refinancing

It’s no secret that mortgage rates are at a near-historic low; the national average currently stands at an average of 4.750%. Compare this to current credit card interest rates – which usually clock in at about 15%, and it’s easy to see why many people are choosing to refinance their mortgages and consolidate all their debt into their mortgage. While this may sound like a great idea for anyone – all of your debt consolidated under a low interest rate – there are still many aspects of refinancing that you need to consider before choosing to go this route. Consider the following before applying to refinance your home.

  1. Home Equity: Your home equity is the amount of money you owe on your home subtracted from the total appraised value of your home. Unless you want to pay PMI (private mortgage insurance) on top of your monthly costs and interest rates, you need to have at least 20% equity in your home before you refinance.  Following the Recession, the decrease in home value has left many homeowners underwater, meaning that they owe more on their homes than their homes are worth so many people have no equity at all. If you don’t have 20% equity, you’ll still have to pay the PMI, but home equity between 10%-15% should be sufficient to qualify you for most refinancing.
  2. credit score

    The higher your credit rating is, the better chance you’ll have for getting a loan that meets your goals.

    Credit Score: Gone is the time when any Joe Shmoe could walk into a bank, apply for a loan, and be approved. Now you need a good credit score if you want to be approved for a good loan; a credit score below 700 may cause you some difficulty in finding a lender who will be willing to offer a mortgage, while the best deals are reserved for those with credit scores above 740. Unless you’re decently certain that your score is good enough to qualify, you probably should wait to apply considering the non-refundable up-front fees of applying for a mortgage that usually totals several hundred dollars.

  3. Debt Ratios: Not only have lenders become more strict on credit scores, they’ve also raised the bar for debt-to-income ratios. While it’s beneficial to have a high income, a stable or long job history, and substantial savings, what lenders usually want is to keep your mortgage payments at a maximum of 28% to 31% of your gross monthly income. It’s generally a good idea to keep your totally debt-to-income percentage below 36% and, if that isn’t feasible for you, consider paying off some debt before you attempt to refinance to help you qualify.
  4. PMI (Private Mortgage Insurance): If you have less than 20% equity on your home when you look to refinance, and you aren’t already paying PMI on your current loan, you will be required to pay PMI, or private monthly insurance. If you need to begin paying a PMI on your refinanced mortgage, make sure that money you’ll save by refinancing is enough to offset the additional cost of PMI, or it might not be wise to refinance. 

    refinancing

    Refinancing costs alone can be expensive, so shop around before you decide where to borrow.

  5. Refinancing Costs: It usually costs between 3%-5% of the loan amount for a home refinance. However, there are several ways you can reduce or consolidate these costs. Some lenders will offer what’s called a “no-cost” refinance, where – instead of the closing costs – you’ll pay a higher interest rate to cover them. Shop around for all your different options, keeping in mind that sometimes these refinancing fees can be reduced or paid by the lender.
  6. Rate vs. Term: If you’re considering a home refinance, it’s important to establish your long-term goals for refinancing. While many people are focused on the interest rate, your long-term goal will determine what type of mortgage you need to meet your needs. If you want your monthly payments as low as possible, you’ll want a loan with the lowest interest rate for the longest term. If your goal is to pay less interest overall, you’ll want a loan with the lowest interest rate over the shortest amount of time. If your goal is to pay off your loan quickly, you’ll want to find a loan with the shortest terms with payments you can still afford.

When looking to refinance your mortgage, it’s important to remember also that refinancing will not erase debt. Rather, refinancing restructures your debt to be more manageable under a different set of terms.