Do You Know These 3 Simple Things About Credit?
When was the last time you picked up a book about personal finance? If you’re reading this, chances are you get most of your personal finance reading done on the internet via blogs like this one, which is great, but there’s still a lot to be said for reading an actual book now and then too.
A few weeks ago I took a rare afternoon off in the middle of the week. (A perk of being self-employed is that I can take time off during “normal business hours” to do errands while everyone else is at work.) I didn’t use that afternoon to run errands or be productive. Instead I decided to spend a little time at my local library. You see, I used to be an avid reader. I read books all the time for fun, but now that most of what I do all day for work consists of reading and writing on the internet, I don’t often carve out time to read books.
When I walked up to the checkout counter at the library after a couple hours of leisurely browsing the shelves and reading excerpts of books I was interested in, I got some quizzical looks. It might be because of the books I walked up to the counter with:
- The Money Book for the Young, Fabulous, and Broke by Suze Orman
- Women & Money by Suze Orman
- LLC or Coporation? How to Choose the Right Form for Your Business
Yes, this was my idea of “fun” reading. #moneynerdinthemaking
Even though I write about money day in and day out, I still have a lot to learn about when it comes to money and personal finance, especially in the area of investing. But I thought the one area I was an “expert” in was credit cards and debt. Therefore, when I sat down to read The Money Book for the Young, Fabulous, and Broke by Suze Orman, I wrongly assumed that I probably wouldn’t learn much until the investing chapter. Boy was I wrong!
Here are 3 things I learned about credit from reading Orman’s book. You can also check out a few tips from our best financial tips to start the new year.
How to Build Credit When You Have None
Because of the messed up way that credit works, it can be difficult to get a loan or credit card when you have no credit. But you have to have credit to build credit so you can get more credit. Confused? There are basically 3 options to help you build credit when you have none.
- Open a credit card specifically for people with low, bad, or no credit. The interest rate will be very high because the credit they are issuing you is based on your income level and nothing else.
- Open a retail card at a department store. This can be somewhere like Dillards, JCPennys, or even Home Depot if you are more into that kind of thing than buying clothes. 🙂 If you go this route, you need to be aware that retail cards have extremely high interest rates.
- Open a secured credit card. A secured credit card is backed by cash you have deposited with the card issuer. Basically it’s like a debit card that is backed by a creditor instead of a regular bank. Secure credit cards are also great ways to rebuild your credit.
When I started building credit, I went for option 2. But I wasn’t smart about it. I opened way too many retail credit cards due to the enticing offers of “save 10% on your purchase today” and then I proceeded to run up a balance on them too, which is still costing me today. Don’t do this!
The key to starting out with these options is to use the card and then pay it off at the end of the month (or billing cycle). You can make small purchases on the card, like some soda at a store, or just gas. Don’t use a credit card to purchase stuff you can’t pay for right now. That will get you deep in debt. Grayson knows about that all to well…
How to Shop Around for a Good Interest Rate on Your Next Loan
You’ve probably heard that having too many recent inquiries on your credit report can really hurt your credit score, and possibly even result in you not getting a loan. But one thing I didn’t realize is that it’s ok to shop around for a good interest rate. In fact, it’s smart to shop around so you can get the best deal.
Orman says, “If you do all your mortgage shopping in a two-week period, all the inquiries will be combined and will count as just one, so your score will not be hurt.”
You should definitely shop around when you get ready to take out a large loan, like a mortgage. You just need to be smart about it so you don’t ding your score and lessen the chances of your mortgage being approved. You can do the same thing with a car loan or even a personal loan. Sites like PersonalLoans.com or SoFi will just pull your credit once and then ask a bunch of lenders to fund your loan application. It makes it much easier to shop around without all the hassle.
How to Increase Your Credit Score Before Applying for a Loan
Another factor that plays into what your credit score is your credit utilization ratio. For example, if your total credit limit is $10,000 and you have $5,000 on your credit card, your ratio is 50%. Lowering your credit utilization ratio as much as possible (try for less than 20%) in the months leading up to your loan application for a mortgage will help increase your credit score, which could help you earn a lower interest rate on your new loan.
That part was obvious, but Orman warns that even if you pay off your credit card balances in full each month you still need to be careful. Depending on when creditors pull your report, it might show that you have a balance on your credit card because you haven’t paid this month’s bill yet. She recommends the best thing to do is to stop using credit cards altogether for two months before applying for a major loan.
If you have a low credit limit, you can also ask for a limit increase. This will quickly increase your credit score as your overall limit increases and you utilization decreases. It’s a quick win, but not every credit card company will do this for you. They look at your income, payment history, and a number of other factors before giving you a credit limit increase.
Even though I thought I knew all these things about credit, this just goes to show you (and me) that there’s still a lot to be learned no matter how much you think you know about credit. Credit is a complicated system and it’s always being updated and changed, so it’s important to be as informed about it as possible. Even if you aren’t a fan of using credit, there are likely some instances in life where you will need to use credit and you’ll need to have a good credit score to get the best interest rate, like buying a house, or making another large purchase.
Did you know these things about credit?