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When Your Best Option Is Bankruptcy

Bankruptcy doesn’t mean your world is coming to an end. In fact, it could end up actually being good for you.

Once you file for bankruptcy it stops wage garnishments, lawsuits and collection calls. Debt is erased. And despite things you may have heard, your credit scores can be helped by bankruptcy.

Scoring experts and credit bureaus frequently claim that the worst thing you could do to your scores is bankruptcy. Collections, charge-offs, repossessions, foreclosures – nothing else is able to drive down your scores as far and as quickly as a bankruptcy can.

However, that is not the entire story. A majority of people struggle with their debt for a very long time that by the time they finally file for bankruptcy their credit is shot already. And after they do file, typically their scores go up instead of down. Their score will increase even more if their debt gets erased – known as a “discharge” in bankruptcy court.

According to Jaromir Nosal, a Boston College assistant professor of economics, you will be much better off within a year. Nosal co-authored a study regarding the effects of bankruptcy for the New York Federal Reserve Bank. He says the recovery process is fairly rapid.

How soon and how much can your credit scores increase

Using Equifax credit bureau data, Philadelphia Federal Reserve Bank researchers found that the Equifax credit scores of bankruptcy filers dropped significantly during the 18 months prior to filing for bankruptcy and afterward rose steadily.

The findings included the following:

For an individual who filed Chapter 7, which in the most common kind of bankruptcy, in 2010 the average score was 538.2 on the 280 to 850 Equifax range (Generally scores in the low 600s and lower are considered to be poor). The average score was 620.3 at the time the bankruptcy cases of the filers were discharged, which is normally within six months.

Chapter 13, the other kind of bankruptcy, requires a 3 to 5 year repayment plan, which is not completed by a majority of people. (According to figures from the Justice Department and analyzed by American Bankruptcy Institute, of all of the Chapter 13’s that were filed from 2007 through 2013, half were dismissed while another 12 percent got converted into Chapter 7’s or another kind of bankruptcy). However, those who did and received a discharge, had their scores increase from 535.2 up to 620.8 according to researchers from the Philadelphia Fed.

A recent FICO study, from the company that developed what is considered to be the leading credit score, showed gains that were much smaller. The median credit scores for individuals who filed for bankruptcy from October 2008 through October 2010 increase from the 550’s prior to filing up to the 560’s afterwards according to senior director Ethan Dornhelm. (A majority of FICO scores are on a 300 to 850 scale.)

After two years of filing for bankruptcy, 28% of filers had 620 and higher scores. After four years, scores were 620 or higher for 48% and just 1% had a score over 700.

However, the study did not distinguish between Chapter 13 and Chapter 7, or between those individuals who received a discharge and those who did not. The results could have been skewed by those who had undischarged debt. So individuals with completed bankruptcies might have seen larger gains that what the median figures reflect, said Dornhelm.

Helping your credit score is just one reason.

There are factors to consider besides credit scores. Some of the other factors include the following:

Collection hell comes to an end: the study by Nosal found that after individuals fell behind seriously on their debts – with one account at least 120 day overdue – their financial problems had a tendency to get even worse. The percentage of individuals with court judgments or balances in collections increased.

By contrast, individuals who have filed for bankruptcy can benefit from the automatic stay which brings most collections to a halt, including wage garnishment and lawsuits. If the underlying debt gets erased, then garnishment and lawsuits come to an end.

Freed of certain debts: Many types of debts are wiped out by Chapter 7 bankruptcy, including the following:

  • Some older tax debts
  • Business debts
  • Past-due utility bills
  • Past-due rent
  • Civil judgments (with the exception of fraud)
  • Personal loans
  • Medical bills
  • Credit card debt

Some debts cannot be erased in bankruptcy, including tax debt and child support. Student loan may be at times, but it is quite rare. However, if you are unable to discharge some of your most troublesome discharge, having other debts erased can give you some needed room for being able to repay your remaining debts.

Better access to credit: Right after a bankruptcy it can be hard obtaining credit. However, Nosal’s study showed individuals who complete their bankruptcies are much more likely to be able to obtain lines of credit within 18 months compared to individuals who fell behind 120 or more at the same but do not file.

After bankruptcy, your credit limits most likely are going to be low. Also, your credit scores and access to credit won’t completely recover until your Chapter 7 bankruptcy doesn’t appear any longer on your credit reports in 10 years.

That is a very long time to be penalized. However, let’s get rid of the idea that people who are faced with bankruptcy are making a choice between getting their bills paid and not paying them.

When you should stop digging a hole you won’t be able to get out of

A majority of us feel obligation to pay the debts that we owe – if we are able to. However, the ship has usually sail by the time most individual realize they need to think about bankruptcy. They can try to keep chipping away at their debts that they might never be able to get repaid, and prolong the damage that their credit scores are suffering as well as diverting money that could be used for supporting themselves when they retire. Or they can realize the situation is impossible and get it dealt with so that they can move on.

When Your Best Option Is Bankruptcy

If you are able to pay your bills, then of course you should do so. However, if you are struggling, then you should check out debt relief options. Bankruptcy might be your best option if you have consumer debt – like those listed above that may be erased – is more than half of what your income is, or if it will take your five years or long to get the debt paid off even if you take extreme austerity steps.

The following is what you really need to know:

It is important to have a bankruptcy attorney: Making a mistake is an easy thing to do with the complicated paperwork that is involved with a bankruptcy. One error could end up causing your case to get dismissed. If this occurs, then you won’t end up with any relief and your credit scores might still tank due to filing for bankruptcy.

Typically attorney prefer being paid upfront. Some pro bono services and legal aid are available, however frequently they are overwhelmed by the demand. You can call your area’s bankruptcy court if you are really broke to find out what the available resources are. Or you can contact your local bar association to see if they can direct you to lawyers who are willing to take a pro bono case on. Otherwise, you are going to have to come up with the money somehow.

  • Raise money the smart way: Cut out any unnecessary expenses, if you have any still. Sell some of your things if you have anything to sell. Or if you are still trying to pay on your credit cards and other debts, you could stop and then use that money to pay for your attorney instead. Another potential option is borrowing money from family or friends. However,don’t open up any new credit accounts for borrowing money. That might be considered to be fraud. It can be problematic to work a second job if it raises your income over your area’s median, since that will complicate your filing. Speak with an attorney about what your options are; many of them offer a low-cost or free initial consultation.
  • Make sure to not wait too long: There is a real misconception that individuals file bankruptcy as soon as there are signs of trouble or when there are other options available to them. However, in reality that isn’t true at all. Some people liquidate assets, like their retirement accounts, that bankruptcy could protect from creditors. Many people have a tendency to throw good money after the bad until it get to the point that they have used all of their money up and don’t have any for seeking relief.

This is why we recommend that debtor who are really over their heads consider bankruptcy first.

Nosal says that that worst thing is not being able to pay and not being able to go bankruptcy. That is when people truly suffer.

What Is The Typical Range For Credit Scores?

Whenever you check on your credit score, most likely you will want to know how you compare with others. What is considered to be a good credit score?

A majority of the credit scoring models that are most commonly used have 300 to 850 ranges. Every lender sets standards of its own in terms of what it considers to be a “good” score. In general, however, scores fall along these lines:

  • 720 and higher: Excellent credit
  • 690-719: Good credit
  • 630-689: Average or Fair credit
  • 300-629: Bad credit

Fair Issac Corp. developed the credit scoring algorithm that most lending decisions in the U.S. utilize. A majority of FICO scores are in the range of 300 up to 850. The higher the score is, the better (There are also some FICO score versions, like those used in the credit card and auto industries, that use a 250 to 900 scale.)

According to the most recent data from April 2015, the average FICO score is 695. Around 54.7% of scores are 700 and higher, 23.3% are from 600 to 600; and 22% of scores are lower than 600.

Here is how these scores break down within each of the ranges, by score percentage:

FICO score ranges and percentages

Scores Percent
800 to 850 19.9%
750 – 799 18.2%
700 – 749 16.6%
650 – 699 13.0%
600 – 649 10.3%
550 – 599 9.4%
500 – 549 7.6%
300 – 499 4.9%

Source: Fair Isaac Corp, FICO scores and data as of April 2015

The VantageScore, which is increasingly being used, uses the 300-850 scoring range as well. According to Experian, the credit reporting agency, in 2016 the average VantageScore was 673. (Since VantageScore and FICO take the same factors into consideration, in general the scores move in tandem; when there is a good score with one of them, it predicts a good score on the other.)

VantageScore ranges and percentages

Scores Percent
800 to 850 15.7%
750 – 799 14.6%
700 – 749 12.6%
650 – 699 18.3%
600 – 649 10.2%
550 – 599 11.8%
500 – 549 12.1%
300 – 499 4.6%

Source: Experian, VantageScore ranges and percentages as of March 2016

How is your life affected by your credit score?

Even if you have a score that is in the low 500’s, it may still be possible for you to obtain credit, however it will either have specific conditions attached, like having to deposit money in order to receive a secured credit card or have a very high interest rate. You might need to put deposits down on your utilities or pay more for your car insurance.

improve-your-credit-using-good-habits

However as you increase your score, you will gain access to additional credit products – and will be able pay less for them as well.

On the other end of the spectrum, borrowers who have scores over 750 have numerous options available to them, including be able to qualify for 0% interest credit cards and 0% financing on cars.

Find your starting point

Knowing where you stand is very important. That is why it really pays to over time monitor your score. There are numerous personal finance websites like NerdWallet where you can receive a free credit score.

The most thing you can do is use the same score each time you check it. Otherwise, it is similar to attempting to monitor your weight using a different scale each time – or switching between kilograms and pounds. Some sources might use a completely different scale. For example, Citi provides some of their credit card customers NextGen FICO credit card score access, which use a 250-900 scale.

So choose a score and then stick with it for monitoring your progress. When one score measures advancements you have made,it will be reflected in other scores as well.

Just be aware that scores fluctuate, just like weight does. A credit score is basically a snapshot. Each time you check the number can vary. As long as it is kept within a healthy range, these variations won’t impact your financial well-being in a significant way.

Lenders look at other things besides credit scores

Whenever you attempt to borrow money, having a good credit score by itself won’t guarantee approval or a good interest rate.

Your credit history is also review to gauge how likely it is that you will be repaying the money you borrow; you could have a ton debt but still have good credit scores if all of your bills have been paid on time.

However, it isn’t reflected in your credit report whether you are able to afford to repay whatever credit you are currently applying for. This is why other debts and your income play key roles in lending decisions, since some lenders will consider what you earn and the assets that you have along with what you owe.

Retirement – How Much Savings Should You Have?

It is the question that many people desperately need to know, yet struggle to actually find out – How much money should I have saved for retiring?

If the answer were easy, few people would be so worried about retirement. Being able to read the future would make finding the money for retirement simple. Unfortunately, it’s impossible to predict the future, making planning for your retirement a complex problem, especially since you can’t even answer such questions as how long you will live (and be needing money), or what medical expenses await you.

However, you can set a functional retirement savings goal using a few tools and some educated guesses about the future. Here are the five steps you can take to start to figure out how much money you will need to retire.

1. Estimate your spending for the future.

Be warned, this step will require quite a bit of work. However, once it’s done, the others will fall into place easily. If you already have a budget you follow, your job will be much easier. The way to project your future expenses starts by looking at what you currently spend.

Jot down your monthly expenses on a sheet of paper or enter them into a spreadsheet. Use an average if your spending on certain things varies. Then, think about whether those entries are likely to remain constant, increase, or better yet, decrease, in the future. In an ideal situation, one example would be paying off your mortgage, eliminating that monthly expense.

In an adjoining column, estimate what each of those expenses will be when you retire. Then, list the things you may not spend money on now, but will once you retire. These could be things like travel, lessons in your favorite hobby, or mahjong. Add up your projected expenses for retirement, and you will have an estimate of what your monthly needs will be at that time. This can be tallied into an annual sum.

2. Decide how much income you will need using projected spending.

In a recent survey, the EBRI (Employee Benefit Research Institute) found that less than 50 percent of workers take the time to figure out how much they will need when they retire.

Retirement - How Much Savings Should You Have?

This means that half of the people reading this article won’t bother figuring out the amount outlined in the first step. That leaves income replacement as a general rule of thumb. It won’t be nearly as accurate, but it is better than having nothing. Just make sure when you use it, it is a general one-size estimate of an amount that has a great deal of variance from person to person.

The most often used estimate is considered the “80 percent rule,” and it says you should try to be able to replace 80 percent of your income pre-retirement. This isn’t the amount of money you earn now. Instead, it is an average of your expected income in the 10 years before you retire. You can find calculators online to help you make an estimation.

The rule is a loose one, and some people believe the number should be closer to 70 percent. Others think you should aim to replace 90 percent. A good place to figure out where you fit is to look at how much you are saving right now for retirement. Once you retire, you won’t be saving for it anymore. This means that if you are currently setting aside 15 percent, you will be able to live on 85 percent of your current income without changing anything else. When you include Social Security, you might be able to bring the number even lower.

These type of loose rules should be used as an estimate before doing a more detailed and tailored look into your expenses. You can figure out if you are close in your estimates or way off. Use it as a jumping off point before doing more fine tuning later down the line.

3. Use a calculator made for retirement.

If you stay truthful when entering your info, a good calculator will be able to give a rough assessment of how you are progressing with your savings by combining your entered estimates with income projections. A good calculator will have researched-backed assumptions included, these may include default estimates for life expectancy, market returns, and inflation projections.

If you want a very accurate result, make sure you consider if these assumptions are right in your individual situation. For example, are your investments going to return the default amount (usually 6-7 percent)? If you have bonds, you may want to adjust down. Do you have grandparents who lived beyond their 100th birthday? You have good genes, but they will be expensive.

All of these factors combine to figure out where you are pointed now and how you can improve your situation. Here are a couple of examples that used NerdWallet’s calculator for retirement.

If a 25-year-old has 10 thousand dollars saved and earns 50 thousand per year wants to replace half that income needs to have $2,800 in retirement. If he saves 12 percent of his current income, around 500 dollars per month, and has an employer who matches his money, he can retire by the age of 68.

If a person who is 35 has 30 thousand dollars saved and earns 70 thousand per year wants to replace that income, she will need approximately $3,670 per month to retire. Putting aside 17 percent of her income, or a thousand dollars per month will let her retire at the age of 68 if her employer matches her dollars.

These examples dhow one fact. The earlier you begin setting aside money for retirement, the less you will have to set aside both per month, and overall. This is where compound interest can make a difference. Unfortunately, the fees for investing will also compound, and NerdWallet research has found that this number can even hit $500,000. If you don’t know what your fees are going to be, you can input your 401(k) into an online analyzer.

Another thing to consider is that these percentages per year are usually an average. Some years you will have to put aside less, other years you may see extra money allowing you to increase your savings. Income and expenses tend to have an ebb and flow to them. The crucial element is putting aside as much as you comfortably can, whenever you can, and use tax-advantaged investment accounts for retirement. These include IRAs or a 401(k). If you don’t know which one is right for you, look online and learn the differences between 401(k) retirement accounts and IRAs.

4. Write down your plan for retirement.

You don’t have to make it fancy or do a formal account, but writing down the things you learned in the previous steps will help inspire you to stay with your plan. According to a top financial services company, LIMRA, half the people who have a concrete plan written out feel prepared to retire, while only 17 percent without a plan feel prepared.

This process is a long one, and it is too easy to justify purchases that benefit you in the short-term, thinking that they won’t impact your financial goals 30 years in the future. The thought is buy the fun thing today, save tomorrow, but often the future savings never happen.

Write out your plan to keep your goals at hand. Affix it to the front of your refrigerator. Include a photo of your dream retirement home on the beach or your favorite sweatpants that you can wear all day when your daily job is a distant memory.

5. Revisit your plans regularly.

Circumstances change all the time, and you will have to adjust your retirement plans to account for them. It may be a new addition to your family, a new job, or an expensive new hobby, make sure you re-evaluate your retirement projections often.

If you enjoy the process, you may even want to re-evaluate your numbers every few months, so you are always on top of your retirement. If you don’t enjoy it, even just once per year is enough. It will always be better to make small adjustments as they come up than struggle to recalculate everything later on.

How To Rebuild Your Credit Following Bankruptcy

A Chapter 7 bankruptcy provides you with the relief of having a clean financial slate. However, it also brings the worry that you won’t have decent credit ever again.

There is a good chance that your credit was completely tarnished if you were eligible for filing Chapter 7. However, that is different from that common misconception that filing for bankruptcy will forever ruin your finances.

Truthfully, you can start rebuilding your credit immediately.

Although it is true that a bankruptcy stays on your credit reports for a period of 10 years, over time its impact does fade. You can help this process through offsetting that negative information with something more positive for your credit report.

Begin with the basics

Lenders at this point want to see if you have enough income for paying your current obligations, with a small amount left over. You will be a much more attractive buyer if you have a lighter debt burden.

In addition, lenders won’t need to worry about you filing for bankruptcy in order to eliminate new debt. That is because you aren’t allowed to have debts discharged for another eight years.

The first thing that you need to do is develop a budget that will help you keep your finances under control. Before you finished your bankruptcy the pre-discharge credit counseling that you were required to go through should have given you information on budgeting. You can also go to a credit counseling agency to get help. Nonprofit credit counseling agencies all provide free basic consumer assistance on budgeting and other topics.

The next thing you should do is start to build an emergency fund. The Urban Institute has conducted research that shows that even having only $250 in savings set aside for unexpected expense can provide families with protection from having to running up their credit cards or having to resort to a payday loan, since this can get a new spiral of debt started.

Plan out your post-bankruptcy credit strategy

It is possible you may be thinking that credit card issuers and lenders think of you as a pariah now. However, that isn’t actually quite true. Of course you will need to prove yourself. However, it is possible to do.

Your goal to build up a good credit score might be the same as somebody who is starting completely from scratch, however you are in a little different situation. You don’t have the problem of creditors not knowing enough about you, but instead that they know quite a lot.

How To Rebuild Your Credit Following Bankruptcy

The first thing you should is assess your situation. This can be done through getting free copies of your annual credit reports and checking them. It might appear to be daunting, however there are guides available that can help you better understand what the various entries refer to. Your credit scores get calculated using information that is contained in your credit reports. Therefore, if there is any inaccurate negative information that can make things even more difficult for you as you attempt to recover from your debt. If you happen to discover any errors, make sure you dispute them and have them corrected.

There will of course also be accurate negative information. Your bankruptcy will appear on your credit reports for 10 years. Debts that go into collection and late payments also stay on your credit reports for seven years following the delinquencies. When you file for Chapter 7, it wipes out your debit, but doesn’t wipe clean your credit reports.

Next, check out your credit score. Free VantageScores are offered by several sources, and free FICO scores are offered by Discover even when you aren’t one of their cardholders. Tracking your credit score on a monthly basis is a smart idea, and it is critical looking at the same score every time. Otherwise it won’t be a useful comparison. Choose one kind of score that you will be tracking and that stick to it.

If you know which credit score lenders will see and clean your credit reports up it will help you know what credit products are the best ones for you to apply for.

Find a product that fits your situation the best

Unfortunately, your payment history from the time before your bankruptcy will make you appear to be a very risky borrower for lenders. This problem can be fixed by providing the lender will extra assurance that lending to you won’t result in them losing money. The following are four things you can do to improve your finances and obtain the credit you need to help you rebuilt your credit score:

Secured loan: There are two different types, and are offered most often by community banks or credit unions. One type of secure loan allow you borrow against money that you have on deposit already. You can’t access the money as you are paying your loan off. You can make the other type without having to pay any cash upfront. However, the money that is loaned to you gets put into a savings account and you only get it released to you after making the necessary payments. The financial institution in exchange agree to send the credit bureaus a report regarding your payment history.

Secured credit card: With this type of card, there is a deposit that you pay that backs the card. Typically your credit limit is the amount of money you have deposited. Frequently a secured card will come with a high interest rate and annual fees. However, you shouldn’t need to have it over the long term. You can use it for improving your credit until you are eligible for an unsecured, better card.

Just be aware that you potentially be turned down for a secured card. Carefully read over the requirements before applying. You want to be confident that you will be approved before applying for a card, since every credit inquiry causes a small, temporary decrease in your score. If you obtain the card, the reduction will be offset and more Just make sure to not use the card too much, and pay your bills on time.

Sean McQuay, a credit card expert with NerdWallet, recommends that you apply for a secured credit card with a local bank or credit union. He said they have a tendency of being a lot more lenient when it comes to credit history, and many of them are happy to work with you so that you can build up your credit profile. However, there is one large caveat to this: before you apply be sure the credit union or bank reports your credit activities to all three of the major credit bureaus. You need to ensure that all of your good credit behavior is going to count.

Co-signed loan or credit card: This another way of helping your score, but you’ll need to have a family member or friend who has good credit history and is willing to be a co-signer for you. That’s a lot to ask of someone. A co-signer has to risk her or his credit reputation to do this for you, and is responsible for the entire amount if you end up not paying, and could face limits on their own personal borrowing due to the extra debt obligation they are taking on. If you don’t end up paying as agreed, a co-signed loan or card can seriously damage your relationship.

Authorized user status: If it’s too much to ask somebody to co-sign for you, you could instead ask if you can be an authorized user on someone else’s credit card. You need to ensure that the credit card reports payment activities to the credit bureaus that are made by authorized users. Otherwise, it won’t help with building your score.

This technique wont help to boost your score anywhere near as much as other methods we have mentioned, since authorized users aren’t ultimately responsible for repaying debt. This method is more likely to help somebody with very little credit information as opposed to somebody with a file full of negative information. However, you might want to go ahead and pursue it since it can’t hurt.

Additional Steps

Once you find a lender who is willing to extend credit to you, make sure to pay on time. Also be sure that your balances on your credit card are kept low in relation to your card limits – typically it is advised to keep them under 30%, however it is even better for them to be less than 10%.

Since you are trying to redeem yourself, don’t get yourself into a position where you are struggling to stay caught up with increasing credit balances or have to beg a late payment to be forgiven.

Once your recent history shows you are finally a good credit risk, all of your hard work in getting your credit reputation restored will pay off for you.

How To Build Your Credit

Building up your credit can be somewhat tricky especially if you do not have a credit history. When that is the case, getting a credit card, a loan, or even a home can be very hard.

So, how do you even show a history of responsible repayment when no one willing to give you credit?

For example, to have a Fair Isaac Corporation (FICO) score, you will be required to have at least one account that has been open for at least six months, and at the very least, one creditor reporting your financial activity to credit bureaus within the last six months. It is important to note that a Vantage Score, which is FICO’s biggest competitor, can be created much faster.

The good thing though is that there are a couple of tools that can help you create a credit history. These include a co-signed credit loan or card, an authorized user status on another party’s credit card, or a credit builder loan. Whichever option you settle for, it is advisable that you use it in a way that it will eventually help you create a good score.

Five ways to establish good credit

1. Apply for, or get a secured credit card

If you are looking to build you credit score from the ground up, then consider starting with a secured credit card. Secured credit cards are backed by cash deposits that you make upfront. The amount you deposit is usually the same as that of your credit limit.

The good thing about a secured credit card is that you can use it just like you would a standard credit card. You can use it to make payments before the due date or even to buy things. However, it is important to note that if you do not pay all your balances in full, you may end up incurring interest. With these cards, when you fail to make your payments in time, the cash you deposited will be used as collateral. But the good thing is that your deposit will be given back to you when you decide to close your account.

It is important to note that these cards are not long term. Their main purpose is to help you build your score to the point where you qualify to get an unsecured card – which is a card without any deposits and with more benefits.

If you are going for a secured card with low annual fees, then make sure that it reports to the 3 main credit bureaus: TransUnion, Experian, and Equifax.

NerdWallet ranks and reviews secured credit card options regularly.

2. Apply for A Credit Builder Loan
Credit builder loans are exactly what they sound like. Their sole purpose is to aid people looking to build their credit.

With credit builder loans, the cash you borrow is held by the moneylender in an account and cannot be released until you have repaid the loan in full. This loan is, in some way, a forced savings program and your loan payments are all reported to credit bureaus. Credit builder loans are often offered by community banks or credit unions, and the good thing is that at least one of these lenders offers them online.

3. Find a Co-Signer
It is also possible to get an unsecured credit card or loan using a co-signer. However, make sure that you and the person you co-sign with understand that he or she will be required to pay the amount loaned in full if you fail to pay. Click here to know more about Co-signing.

4. Consider Becoming An Authorized User On Another Person’s Credit Card

Family members or close relatives may be willing to have you added as an authorized user on their card. As an authorized credit card user, it is easier to get access to credit card options, allowing you to build up your credit history. However, you are not legally obligated to pay for the charges you incur.

How To Build Your Credit

It is advisable that you ask the cardholder to find out if the card issuer reports the activities of an authorized user to credit bureaus. While these activities are generally reported, it is still advisable that you find out if the card issuer does – otherwise, your efforts to build your credit will all be in vain.

Make sure that you reach an agreement on how you will use the card before you are made an authorized user. If the cardholder requires you to pay your share, then consider doing so though you are not legally obligated to do so.

5. Get Credit For Rent You Pay

Rent reporting companies like RentTrack and Rental Kharma take bills you are paying and put them on your credit report. This helps build a more positive history by showing that you make payments on-time. Not every lender considers these payments; however, some do, and that is enough to get a credit card or loan that improves your credit history.

Good Habits Build Credit Score

The truth of the matter is that building a good and strong credit score will take time – normally about 6-months of on-time payments. To improve your score, these good credit habits will show that you are creditworthy:

  • Make all your payments and pay your bills on time, every time to improve your creditworthiness. Bills that stay unpaid for long can be sold to collection agencies, and you do not want that happening as it will hurt your credit.
  • Make sure that your credit utilization (your balance compared to your limit) is always low. It is advisable that you consider paying balances in full every month, however, if you do carry any balance, do not let it go past thirty percent of your credit limit.
  • Keep accounts you have open for as long as you can. Unless one of the cards you have has an annual fee, keep the rest open and active to lengthen your credit utilization and payment history.
  • It is advisable that you avoid opening up too many accounts all at once; new accounts tend to lower the average age of an account, something that makes up your credit score.
  • Annually check your credit reports for any discrepancies and errors.
  • Learn To Check Your Credit Reports and Scores

Credit reports are a record of how you have used credit in the past. Credit scores, on the other hand, estimate how you will handle credit in future days by using the information made available in your credit report. It is important that you monitor these two things to see if your credit building efforts are paying off and look for errors that may affect your overall score.

A couple of personal finance websites like NerdWallet, amongst others, offer free credit scores. Look for a website that also offers free educational tools like credit score simulators as well as free credit report information.

There are also a couple of credit card issues that allow online access and print FICO scores on their customer’s monthly statements. Some even go above and beyond by offering free scores to anyone in need of them – cardholder or not. Capital One offers free VantageScore on its CreditWise website while Discover offers free FICO scores on CreditScorecard.com.

How Having Great Credit Can Be Powerful

Credit scores are considered a tool for financial needs, but how good the score is will determine whether it is a simple lever or a sledgehammer.

You can use your great score to score a great deal, on everything from credit cards and loans to even cell phone plans. Having a bad score can lead you to pay more on your purchases or missing out completely.

The cost of having a higher interest rate from a poor or even mediocre credit score can hit or go beyond six figures over the course of your life. For example, using the rates that Informa Research gathered:

A person with a FICO score around 620 will end up paying 65 thousand dollars more on their 200 thousand dollar mortgage than someone who has a FICO score over 760. (FICO scores are usually measured on a scale between 300 and 850)

On a 30 thousand dollar auto loan over 5 years, a buyer with lower score will pay 5 thousand dollars more.

A home equity loan of 50 thousand dollars over 15 years will cost a low scoring person over 20 thousand dollars more.

Since credit scores are used in so many aspects of a person’s financial life, it is worth the time to manage and understand your score and how your actions will impact the number. Regardless of your income or how old you are, it is possible to build and take care of great credit.

A quick fact: Most people have more than one score. These scores can change often. Your score can also change depending on which formula is used for scoring, as well as which credit bureau gave the information that was used to determine the score. If you want to keep track of how your credit score changes over time, the score you monitor should be the same type and from the same bureau. You don’t always have to pay to get your score. You can often get your FICO score or your VantageScore free from your bank or the company which issues your credit card. You can also check financial sites like NerdWallet, where you can get something like a VantageScore 3.0, a measurement similar to a FICO.

Once you learn more about your credit score you can:

1) Build up your credit without building debt.

Millions of people out there don’t have a credit score at all because they never used it or haven’t used it anytime recently enough to generate a score.

If you don’t have any credit, a good first step would be to apply to get a credit-building loan. This places the loan money into a savings account you cannot claim until you make 12 payments on time each month. Many financial institutions like credit unions offer credit-building loans, as well as online lenders like Self Lender.

Another way to build up your credit is with a secured credit card. This is a card which is issued with a credit line matching the amount you deposit into the bank.

Once you have established a score, you can use online credit score simulators to see what type of actions will hurt it or help it.

2) Improve your credit using good habits.

If you want to improve your score, you have to pay your bills on time. This is the most important factor.

Another important factor is credit use that is regular but light. Know what your credit limit is and don’t charge more than 30% of your limit.

Improve your credit using good habits

Pay off your balances in full. You shouldn’t carry debt if your goal is to improve your score. If you do have a balance that you carry, try to get it paid down as soon as you can.

Try not to close any accounts if you want to grow your credit score. Once you have a high score, such as 760 or higher, you can close an account without doing major damage, but you should keep your credit cards with the highest limits open.

3) Maintain and take care of your credit score.

Once you have a good credit score, considered 690 or higher, you can lose a lot if it goes down.

One missed payment can take your score down 100 points or more. To prevent any inadvertent lapse, consider putting your credit payments on automatic withdrawal.

Having an account in collection or a judgment from a lawsuit against you can also lower your score. Keep your medical bills current, since they can be put into collection without much notice.

Another good reason to keep an eye on your credit report is the potential for identity theft. You can get information on your credit report, updated weekly, on a site such as NerdWallet. You can also get a free report from each of the three major credit agencies once per year. Not all of your information will be the same at each bureau, but most of it will be.

4) Use good credit to your advantage.

Once you have gotten your score up to 700, you will be considered a favorable risk. Once you reach 760, you become ideal. You can expect to see the very best terms and rates that lenders offer, as they will compete to get your business.

Reconsider which auto insurance you use as well, as improved credit can lead to better rates. If you have been with your current insurance provider a while, they may not have rechecked your credit since it has improved. You can ask for them to check your score again. This is also a good time to shop around.

With the amount of money you can save, you can also make a bigger impact on other financial goals you may have, such as retirement, emergency funds, or eliminating debt.

That is how powerful a great credit score can be. Instead of having to beg providers for a loan that you pay too much for, you will have plenty of options to help you get ahead.