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The Best Ways to Build Credit Fast

The Best Ways to Build Credit Fast

Good credit is an important part of life and for those young adults who need student loans for college, their first car, or a new home, the lack of a credit history can be a problem. There are quick ways to build good credit and establish a positive credit history. Responsible financial habits, when established early, can ease the transition to adulthood and financial independence.

Here are the best ways to build a good credit score fast.

Why You Need To Build Credit

As a young adult or recent college graduate you may be wondering why it is important to build credit in your early 20’s. If you needed financial aid and student loans to get through college then you likely had your parents co-sign your debt, meaning the financial institution who issued your funds was willing to overlook your lack of credit history. However, as the real world looms and your parents are no longer offering you a financial cushion, getting credit can prove to be more challenging.

Due to the lack of financial education in the United States, many millennials who are just starting out in the world may not realize how crucial a good credit score history is to financial security and independence. Here are just a few ways your credit score is used and why you need to build your credit fast.

  • Credit Card Companies– Credit card issuers use your credit history to approve or decline applications. Once you are approved, a credit score can determine how high or low your interest rates are. Similarly, if you need more credit to purchase higher-priced items, you may need a credit limit increase.
  • Home Loans and Mortgages– These are likely the largest purchases you’ll ever make. The interest you pay on your mortgage will amount to hundreds of thousands of dollars, depending on where you live. Because of the amount of a home loan, a higher interest rate due to a low credit score or bad history can cost home buyers tens, if not hundreds, or even thousands more in interest payments.
  • Auto Loans– When buying a new or used car, most adults often finance their purchase. The final amount you pay for this depreciating asset should be as low as possible to help you divert extra cash to other activities that actually create wealth, such as investing. Your credit score and history may either earn you a no-interest loan or overburden you with higher monthly rates.
  • Getting A Job– Many employers check your credit score to determine your financial habits. The idea is that a financially responsible individual who manages his/her own finances well is likely to be a better employee.
  • Car Insurance Coverage– No one likes paying insurance premiums, yet auto insurance is mandatory in the United States. Furthermore, statisticians have found a positive relationship between people with high credit scores and safe driving. For this reason, the best car insurance companies in most U.S. states check your credit score to determine your insurance rates, offering a discount to drivers with strong credit.
  • Business Loans– Buying a business tends to be the surest way to financial independence in the United States. However, as a first-time business buyer most purchases require the cooperation of the Small Business Administration (SBA). SBA loans often require a sizable as well as a strong credit history to get approved. Having no or bad credit can be the difference between the ability to buy a business and being forced to pass up an incredible financial opportunity.

Now that you know why you should care about building up credit, let’s discuss how to actually do it!

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It Starts With Your Job

In order to build credit and establish a history, an individual must have a stable income and for most people that means getting and keeping a job. Whether the job is part or full time, an employment history is the first step to building credit.

It is important to remain employed at the same job for at least a year unless, in the case of students, the job is temporary or seasonal. Jumping from job to job causes your income to be unstable, making it difficult to get credit.

Open Bank Accounts

High school and college students can establish checking and savings accounts at local banks or credit unions. While having bank accounts will not improve your credit score, it will establish you as a customer and may make it easier to obtain credit through your financial institution.

It is also important to maintain the accounts in good standing since overdrafts can have a negative impact on your relationships with the bank. With a savings account and a decent income most people over age eighteen can obtain a secured credit card or loan.

Apply for Secured Credit Cards

Debit cards, which are issued with checking accounts, do not report to credit bureaus and will not build your credit history. A secured credit card has a credit limit equal to the amount in a savings account that is used to ensure the principal of the loan will be paid if the account holder defaults on the payments.

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These credit card companies make regular reports to credit agencies and can improve your credit score and establish a payment history. The money in the savings account that secures the card cannot be withdrawn unless the card is paid off and cancelled.

Like other credit cards, secured cards have monthly payments that must be made on time to build a good credit history. The best strategy may be to use the card only for essential monthly expenses and to pay it in full each month.

Interest rates on secured cards can be high and by paying the card off each month, cardholders avoid paying interest while their timely payments improve their credit score and build a good credit history.

Consider Secured Loans

The first loan many young adults obtain is a car loan which is a type of secured loan. The loan is secured by the value of the car and if the debtor does not make the payments when they are due, the lender repossesses the vehicle.

As a rule, banks and credit unions offer lower interest rates on car loans than finance companies. Plus, being a customer of the bank you get the loan from increases your chances of being approved.

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Paying off a car loan is a great way to build a credit history fast, but it is important to keep monthly payments affordable. Include the cost of full coverage car insurance when deciding how much you can spend on a new or used car. Lenders require full coverage as a condition of the loan.

Getting Unsecured Credit Cards

Once you have established a good payment history for about one year you can apply for unsecured credit cards. If you already have a relationship with a bank, you are more likely to be approved for unsecured credit through their credit department.

The credit limit on unsecured cards is based on your credit score, payment history, income, and outstanding debt. Just as with secured cards, it is important to pay these cards in full each month to show responsible spending habits.

Shop around before applying for a credit card. Different cards may have different interest rates and some have rewards programs that offer cash back on everyday purchases. You should also consider the fees that apply to the cards since some have annual fees while others may charge high transaction fees, especially for cash advances.

Choose a card that fits your spending and lifestyle habits. It may be better to apply for a card with a higher interest rate and a good rewards program if you intend to pay off the full balance every month.

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Automate Your Payments

If you forget to pay your bills on time it can hurt your credit history. Automating payments insures that all your bills get paid when they are due. There are two options for making automatic payments. You can either:

  • authorize your bank to release the funds from your checking account on receipt of an electronic bill, or
  • you can charge the payments to a credit card and pay off the credit card bill each month.

Using a credit card will improve your credit score and help build your credit history as you pay your regular monthly expenses.

Do Not Apply for Multiple Loans or Credit Cards

If you apply for several credit lines at once, it will have a negative impact on your credit score and can hurt your credit history. It is better to apply for one line of credit and allow some time between credit applications.

Each time a lending institution pulls your credit report, it lowers your credit score unless you are comparison shopping for a single loan (e.g. auto loan) and apply through all the lenders within a 30 day period. This would be considered a single inquiry for your credit report.

Instead of applying for new credit cards, request an increase of the credit limit on the cards you already use. Nearly one third of your credit score is based on the ratio of your available credit to your actual debt. If you have a high credit limit with a low debt balance, it raises your credit score.

Even if you do not plan to use the additional credit, it is smart to apply for the increase since it will improve your score and credit history.

Final Word

It usually takes between one and three years of good payment habits to establish a credit history. A good credit score can help young adults who are seeking full time employment and housing for the first time since employers and landlords often pull credit reports when considering applicants. If you build your credit history fast and early, you will have a good head start on your financial future.

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Gary Dekmezian

Entrepreneur

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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