Advertising
Advertising

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!

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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.

More by this author

Gary Dekmezian

Entrepreneur

How To Make A Good First Impression The Pros and Cons of Popular Blogging Platforms How Do I Choose The Best Hairstyles For Me? The Best Ways to Build Credit Fast When Is A Good Time To Refinance Your Student Loans?

Trending in Money

1 How to Set Financial Goals and Actually Meet Them 2 25 Killer Sites For Free Online Education 3 How to Develop a Millionaire Mindset in 6 Simple Steps 4 5 Books You Must Read if You Want to Be a Millionaire in Your 20’s 5 20 Better Money Habits to Help You Increase Your Savings

Read Next

Advertising
Advertising
Advertising

Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

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. And 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 on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

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

1. Be Clear About the Objectives

Any goal (let alone financial) 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 is for. It could be anything like kid’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, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them 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 out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for 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”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

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

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as 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.

More on this later when we talk about how to achieve financial goals.

Advertising

5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

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

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 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. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation 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 monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

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

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

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 then manage all the expenses from the rest.

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

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

Advertising

Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

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. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. 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 counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So 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.

Advertising

6. 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. And it would be rather easy to lose the grip over your discipline.

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

7. Maintain a Journal

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

So 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.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

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

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is 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.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

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.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

Advertising

So 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 as compared to equity instruments.

10. 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.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

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

11. 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; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do 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

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

More About Personal Finance Management

Featured photo credit: rawpixel via unsplash.com

Read Next