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Understanding credit
1. How to Build Credit from Scratch
Apply for a Credit Card
Secured Credit Cards
- Utilize a secured credit card as a low-risk option.
- Deposit a sum of money as collateral.
- Pay off balances on time to avoid high APRs.
Student Credit Cards
- Tailored for college students.
- Features low interest rates and competitive rewards.
- Ideal for those starting with limited credit history.
Store Credit Cards
- Available at various businesses.
- Often has low or no credit score requirements.
- Use responsibly for necessities.
Report Rent and Utilities
- Although not typically reported, ask landlords to report rent payments.
- Timely payments showcase your ability to meet financial obligations.
Take Out a Credit Builder Loan
- Offered by banks, credit unions, and self-lending companies.
- Small-scale loans designed for credit building.
- Make timely payments to establish positive credit history.
Negotiate a Loan
- Negotiate loan terms for significant purchases.
- Consider collateral or a cosigner for favorable terms.
Consider a Cosigner
- Useful if lacking sufficient funds, under 21, or with no credit history.
- Requires a cosigner with a strong credit history.
- Payments impact both your and the cosigner’s credit.
2. How to Continue Building Credit
Become an Authorized User
- Be added to someone else’s credit card account.
- Builds credit without full responsibility for debts.
- Choose a trusted friend or family member.
Pay Off Credit More Often
- Pay more frequently than the required monthly payment.
- Keeps credit utilization low and demonstrates responsible financial behavior.
Request a Credit Limit Increase
- Ask credit card lenders to raise your credit limit.
- Pay off outstanding balances before making the request.
- Lenders may consider factors like payment history and frequency.
Check Your Credit Score and Reports
- Monitor credit score regularly.
- Identify trends and behaviors affecting your score.
- Check credit reports for accuracy and potential fraud.
Address Negative Credit Entries
- Identify and dispute inaccuracies on your credit report.
- Negative items can be removed if proven inaccurate.
- Consider professional help from credit repair services if needed.
3. How Is a Credit Score Calculated?
- Payment History (35%)
- Timely payments positively impact credit.
- Late payments, defaults, and overdue amounts have a negative effect.
- Amounts Owed (30%)
- Considers total debt and credit utilization ratio.
- High debts, missed payments, and high credit utilization impact negatively.
- Length of Credit History (15%)
- Longer credit history adds credibility.
- A long, negative credit history can significantly lower the score.
- Credit Mix (10%)
- Considers diversity in credit types.
- Various credit types (credit cards, loans) positively impact credit.
- New Credit (10%)
- New credit applications and hard inquiries.
- Hard inquiries have a temporary impact; multiple inquiries in a short period can be viewed as risky.
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