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How to build your credit the right way
Whether it's building credit for the first time, or, repairing it after a significant adverse event it's critical to know how to do it the right way. I often counsel my clients on credit repair and the comment I hear most often is 'how quickly can I get this done?' My answer is always the same, which is 'that depends on you.'
Having been there myself once, I can affirmatively say that there's no such thing as a quick fix when it comes to credit repair. How quickly your credit profile improves is in direct relation to how committed you are and, how rigidly you stick to a plan. If you want to build or rebuild your credit, there are specific steps you must take, and I've listed them here for you.
Do not hire a credit repair company. It's not open for discussion; I'm serious, don't pay someone to do for you what you can do for yourself for free. That's insane.
Do not add yourself as an authorized user to someone else's account. Admittedly this sort of works, but only if that other person pays their bills on time. Counting on someone else to be responsible with their credit is just too big of a risk to take.
At your very first opportunity, go to your bank and open a secured credit card. With a secured card you give your bank $500 for example, and they put it in your account and freeze it so you can't withdraw it. Then, they give you a credit card with a $300 credit limit. The card works just like any other card would; it's only secured with your frozen funds.
Now that you have this secure card, you need to use it. But, it needs to be used correctly to build credit. Most people do not use their credit cards to their advantage, and that's especially true when rebuilding credit. So let's go over how to use it correctly. Use your card in this manner:
- Month one, charge $100 and when the bill comes, pay $75.
- Month two, charge $75 and pay $50 when the bill comes
- Month three, do not use the card, pay the $50 balance you have in full
- Month four and going forward, repeat what you did the first three months
Credit cards rate you based on your utilization, which is how much you're using compared to your credit limit. By doing the above, you're keeping your balance at 30% or less of your total limit, which is right where the credit bureaus want you to be. Credit cards also rate you base on your ability to manage revolving credit. If you pay your bill in full every month, you always have a zero balance, so there's nothing to rate you on. By doing the above, you're revolving a small balance two out of the three months. The credit bureaus will love you for handling your card in these two ways, and your credit score will reflect that. Probably after about six months or so you're going to start getting credit card offers in the mail. Go ahead and take one and use the new card in the same manner as your first one. You'll now have two cards reporting perfect usage to the credit bureaus.
A side note: The great thing about secured credit cards is they are secured only for a little while. Once your bank sees that you're handing your account correctly, they'll unfreeze your $500 and give it back to you.
If you use your credit cards in this manner and religiously stick to this plan, you'll see your credit score sky-rocket. It is not uncommon for scores to increase 100 points or more by merely changing the way you use your credit cards.
The sooner you start, the sooner you'll reach the credit scores you're looking for!
If you have questions about any part of the mortgage process, feel free to contact me. I'd be happy to help!
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Phone or Text: 321-794-5626
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