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10 Tips for Achieving Stellar Credit

Having good credit is easy if you understand the rules. If you follow ten simple tips, you’re well on your way to the credit of your dreams. Stellar credit doesn’t happen overnight, but it doesn’t take forever. The most important thing to keep in mind is that if you never start, you’ll never get there. So get started on one of the most important journeys you are likely to take.

  • Pay on time, every time. The most important thing you can do to achieve stellar credit is to pay your bills on time, every time, and to pay at least the minimum required amount. This simple practice is a major factor in credit scoring and a major item that lenders look for when they underwrite loans or consider applications for purchases, insurance policies, jobs, and leases.

  • Perform periodic credit checkups. You don’t wait until your engine seizes up before getting out the dipstick and measuring how much oil you have left in your car. Well, taking a periodic peek at what others say about you on your credit reports is financially just as important!

    Review your free credit report from one of the three major credit bureaus every four months. Read the report carefully to make sure that no inaccurate or outdated information is included and that no positive information is missing. Dispute inaccurate items and any negative items that are more than seven years old, and be sure to challenge the credit bureau on items you don’t recognize, because they can be signs of identity theft.

  • Take advantage of free extra credit inspection opportunities. In addition to the free look you get at each of your credit reports every 12 months, you’re entitled to an extra free inspection if

    • You were denied credit.

    • You’re unemployed and seeking work or you’re on welfare.

    • You believe that you’ve been the victim of identity fraud or theft.

    • You didn’t get the best rate from an insurer or lender.

    • You’ve had an interest rate increase or a credit line decrease.

    • You place an active-duty military alert on your credit file.

    • You live in Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey, Puerto Rico, or Vermont, which require the bureaus to give you more than one free report each year. Some states require three free requests!

  • Strengthen your credit history quickly. Trying to build or improve your credit? A loan or line of credit may be just the ticket. Showing that you can use credit responsibly helps establish your credit and payment history. Here are four easy opportunities to get some points on your credit scoreboard quickly:

    • Retail store cards are a great first step to building credit muscle. Use them for purchases you’d make anyway, and pay the balances on time and in full each month.

    • Passbook loans are reported as installment loans because you borrow a specific amount with a defined monthly payment.

    • Secured credit cards are issued by banks and credit unions and look just like other credit cards, with one big difference: They’re backed by money that you have on deposit with the card issuer. The deposit guarantees that the lender gets paid if you forget to make a payment. But you won’t forget, right?

    • An authorized user account adds your name to the account of a relative or loved one, and you’re issued a card to use. Adding your name to the account of a person with a good credit history can enhance your credit. The account’s history is reported on both the account owner’s credit report and yours. But choose wisely — the account owner’s negative history becomes yours as well.

  • Reduce balances on your revolving credit accounts. One of the fastest ways to improve your credit is to decrease your credit-used-to-credit-available ratio (or credit utilization ratio). This means paying down the balances that you carry over from the previous month. For example, if you have a credit card with a limit of $5,000 and your balance is $2,500, your credit-used-to-credit-available ratio is 50 percent — you’re using half of the credit you have at your disposal. Lenders think it’s stellar if your ratio is lower than 25 percent.

    FICO dings your credit score if your ratio is above 50 percent. So if you want to up your credit pizzazz, start by paying down your balances to below 50 percent of your credit limit, and then shoot for a ratio of less than 25 percent.

  • Prune your credit to keep it in bloom. Like tending your garden, you want to trim unused lines of credit but keep the strong old credit lines that you’ve been nurturing for years. Having credit lines that you don’t intend to use can hurt your credit. All that unused credit can become unaffordable debt that can jeopardize your next loan payment. The result may be that a lender is less comfortable giving you credit. If you haven’t used a credit card in a year or you don’t intend to use it, consider closing the account.

    Accounts older than ten years that have positive histories are the gold standard of good credit. Lenders like to see stability and loyalty. So keep those accounts, especially if you open a new one, which hurts your score. From a scoring standpoint, closing an account won’t affect your longevity points because the closed account will continue to appear on your credit report and be included in your score. Bureaus typically report closed credit card accounts with only positive information for ten years.

  • Avoid overapplying for credit. In your enthusiasm to achieve stellar credit, don’t apply for every offer that comes your way. First, you’ve cleared only the pre-approval process; you can still be turned down. When you ask for new credit or a line increase, your score drops. Applying and being turned down counts against you even more. Depending on which scoring model is used, being turned down can count very heavily against you.

  • Get help before you need it. If you want some additional assurance that you’re on the right track, you may want to look for free professional help. Here are two sources:

    • A legitimate nonprofit credit counselor can help you come up with a comprehensive plan to manage your money and meet your goals.

    • When you’re consistently paying all your bills on time, building new credit, and saving, a good financial planner can give you the hope and incentive you need to balance today’s spending and saving with tomorrow’s needs. You have to pay a financial planner if you decide to work with one, but the first visit or two should be free.

  • Pledge never to cosign. Cosigning on a loan is rarely helpful to either the cosigner or the borrower. So raise your right hand and repeat: “I pledge never to cosign for anyone!”

    Here’s how cosigning works in theory: A person wants to borrow money for a good reason, but she has bad credit and can’t get a loan, so she gets a person with good credit to cosign the loan. The loan is issued, the payments are made, and everyone lives happily ever after.

    Here’s how cosigning works in reality: A person wants to borrow money, but a creditor refuses to make the loan. The borrower has bad credit for good reason. She gets a person with good credit to cosign the loan. The loan is issued, and the payments aren’t made consistently or at all. Collectors come after the cosigner. The cosigner pays the bill, and the cosigner’s credit is ruined. The defaulting borrower blames the cosigner for not doing more or being more understanding. They don’t talk to each other ever again.

  • Guard against identity theft. Now that you’re on your way to stellar credit, watch out. The last thing you want is for an identity thief to mess up what you’ve worked so hard to achieve. To protect yourself from identity theft, follow these tips:

    • Guard your account numbers. Be careful with credit card statements, bank statements, and other financial documents. Shred any documents that you don’t file away that contain account numbers or personal information.

    • Be wary of phone transactions. Never supply credit card or Social Security numbers over the phone unless you initiated the call and you know who you’re dealing with.

    • Protect your Social Security number. Don’t keep your card in your wallet or purse.

    • Check credit reports for evidence of identity theft. Review one of your credit reports every four months.

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