Growing great credit is a progressing procedure that begins with seeing how credit reporting works. While paying your bills is a crucial stride in the right course, there are other littler, lesser-known strides that are critical to setting up and keeping a perfect credit report and a decent financial assessment. Applying these means will go far in giving you the financial record you merit.
# Check your credit report for accuracy
Check your credit report regularly to ensure that the data included is accurate. While you want to look out for obvious errors, such as accounts that may have been opened as the result of identity theft, there are other smaller errors that may exist that can harm your credit. In addition, look at your name on the report to ensure that it’s accurate. Something as obvious as changing your last name from your maiden name to your married name could make a large difference in your ability to obtain credit, as your married name and maiden name may not be linked within your credit history.
# Establish credit history
Make sure that you actually have a credit history. Without any sort of credit history to go on, lenders have a difficult time evaluating whether or not you are a risk. Keep in mind that each individual has their own credit file and report, so spouses will each need credit cards and/or loans in their own name. If you don’t like the idea of having credit cards or loans, consider a secured credit card or a credit card with a low limit that you pay off every month, establishing that you are a reliable and trustworthy consumer.
# Stay loyal to creditors
Being loyal to your creditors is the next step. Creditors like to see a strong history so keeping cards open for a long period of time is beneficial to your credit score. While the first credit card you opened may not have terms as appealing as some newer cards, consider contacting your existing lender for better options rather than canceling.
# Find a balance
Make sure that you don’t have too much open credit. Lenders often look at your credit lines as potential liabilities, and this can hurt you. On the other hand, using a high percentage of your available credit can also be detrimental to your credit score. It’s essential that you develop a good balance.
# Pay bills on time
Pay your bills on time. When payments are delinquent, creditors report this information to the credit agencies, and it can harm your credit score. Timely payments of the minimum required payment or more shows creditors that you have a history of paying your bills on time.
# Why is my credit history important?
At some time in your life, your credit report becomes essential to obtaining mortgages, insurance, credit cards, car loans, and other credit, and may even be seen by your current employer or a potential employer. The best way to ensure that your credit report is accurate and positive is to check and monitor it regularly.
# What information is contained on my credit report?
All credit reports contain a variety of personal data about you; specifically, your name, last known address, birth date, Social Security number, and employment history. Though this information is included on your report, it is not used in determining your credit score.
The next section of your credit report contains all pertinent details regarding any loans that you have taken out in your name, for example: type of account, current balance, payment history including any delinquencies, loan term, and the date the account was opened. Bankruptcies, judgments, and foreclosures, if relevant, are also included on your credit report.
Another section of your credit report lists inquiries into your credit history. Potential creditors may view too many inquiries in a short period of time negatively.
# Who reports to the credit bureaus?
Any company that supplies you credit, from student loans and mortgages, to personal loans and credit cards, reports information about your loan to the three major credit agencies. That information can be included on your credit report. You may have slightly different information on each of the three credit agency reports.
# How often is a credit report updated?
Credit reports are updated as frequently as the supplied information changes. Most accurate negative information remains on your credit report for seven years.
# Where do I get copies of my credit reports?
The Fair and Accurate Credit Transactions Act (FACTA) gives every consumer the right to a free annual credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. To get your free report, visit AnnualCreditReport.com or call 877.322.8228. You can request a free credit report from one agency at a time, or all three at once.
You may have recently seen your credit score and wondered how you could improve it. Understanding what is used in the calculation of your credit score is the first step. While the exact formula used in the calculation of the score is proprietary, there are some known factors. According to the Fair Isaac Corporation, creators of the FICO score, the key factors are:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
There generally isn’t any action you can take that will immediately result in a higher credit score, but applying good credit practices over time can help improve your score.
Making payments to creditors on time is the most important thing. While not all creditors report on time payments, they do report payments that are delinquent. The length and severity of delinquencies is also considered.
In addition, you should make sure that you aren’t using the full credit limit available to you. Creditors generally report to the credit bureaus once per month, and even if you pay off the balance every month, it could be viewed negatively if you are using a higher percentage of your total credit.
If you do have some negative items included in your credit report and score, those items will most likely not be removed for at least seven years from the date the negative activity occurred. However, making on time payments in the future will continue to improve your score, as more recent history is given greater weight.
In most cases, keeping credit accounts open is likely to help you, not hurt you. While potential creditors do look at the amount of outstanding credit you have available, they also look at the length of your credit history, as well as the percentage of credit used. Closing older, lesser-used accounts can hurt your score by decreasing the length of history you have, as well as increase the percentage of your total credit you are using. New credit, which is one of the factors used in calculating the score, includes number of recent account inquiries, and number of new accounts opened.
It’s also important to review the type of credit that you are currently using. Different types of credit cards, for instance, are viewed differently in the scoring algorithm. While getting rewards points and a first time discount sound appealing, department store credit cards are generally not as good for your credit score as a major credit card. Mortgages, automobile loans, and student loans are also considered “good” kinds of credit.
The largest impact you can make on your score is continuing on time payments, and taking on debt with a thoughtful approach.
# Pro : You are your own boss.
When you are calling the shots, your business can be structured around your passions. You choose the work, the clients, and the hours. You alone are responsible for the success of your business, and that is this best motivation.
# Con : You are also your own accountant, marketer, tech support, customer service representative, and custodian.
Running your own home-based business is a lot of responsibility. The job encompasses more than just doing work you love, at times you will also have to do support work to make your business successful.
# Pro: Balanced career and family life.
Working from home allows you to spend more time with your family. Setting your own hours and vacation time allows you to fit your family’s schedules together seamlessly.
# Con : The scale can easily tip toward home responsibilities.
Working from home can be a distraction, especially if you have young children or have a difficult time ignoring home-related chores and errands. Setting up a distraction-free area to work and allotting a certain amount of time per day to focus on your work can help increase productivity.
# Pro : Increased tax benefit and write-offs.
If you have an area of your home dedicated solely to your business, you may be able to take a home office tax deduction. Other expenses can also be deducted as well, just be sure that you are able to justify the expense as the cost of doing business.
# Con: No health insurance benefits unless you pay out of pocket.
Paying for private insurance is expensive, but is worth the hefty price tag in case of a medical emergency.
# Pro: Your office is down the hall and you can work in your pajamas. No commute and no required office wardrobe are two of the money-saving perks of working at home.
# Con: You may miss the interaction with coworkers.
If having a sounding-board for your ideas is important to you, consider joining a networking group or professional association so you can interact with others in your field.
# Pro: Increased income potential.
Owning your own business allows for far greater earning and growth potential. Plus, all your hard work and determination directly benefit you.
# Con: No set income.
While there is the potential for greater income, there is also a possibility that you will have some periods where the work and the money dry up. Having an emergency savings account can be a great relief during times when you are not making any income. In addition, having a spouse’s salary to fall back on can also be beneficial.
After you have measured the advantages and disadvantages of a home-based business and chose that independent work is ideal for you, your next stride is to build up an arrangement. Your marketable strategy ought to characterize your business and distinguish objectives. At the point when building up your arrangement, research laws that may affect your business. First off, you should see whether you require a permit or allow to work your business. A decent marketable strategy likewise incorporates budgetary data, for example, an asset report and pay proclamation.
When working on your business’ financial plan, don’t forget to develop a method for managing your new personal financial situation. Unfortunately, statistics show that many home-based businesses fail often due to poor financial planning. Following are some ideas to help make self-employment work for you.
# Keep tabs on your taxes. Some self-employed individuals may have to pay up to a 15 percent self-employment tax in addition to their regular income taxes. To avoid tax-time surprises, periodically review your taxes throughout the year. Don’t forget to make necessary quarterly tax payments to avoid under-withholding penalties.
# Don’t underestimate your expenses. Fortunately, more than 40 percent of all home-based businesses require less than $5,000 for startup. However, there are many other costs associated with running a business. In your spending plan, don’t forget expenses such as childcare, insurance, postage, gas, and dry cleaning.
# Manage your income. Most self-employed workers have sporadic incomes. If your income varies from month-to-month, determine your average monthly income. Then, if you have a month where you earn more than average, put the extra amount into a savings fund to supplement less lucrative months.
# Avoid relying on credit cards. Borrowing from a credit card can quickly lead to costly trouble. If you need to use a credit card for business expenses, open an account specifically for that purpose. If you need money to launch your business, consider a small business loan instead.
# Keep accurate records. Complete all of your paperwork on-time, particularly if you are billing clients or customers. Many companies will take several weeks to process invoices. Keep copies of all receipts for tax time. Because networking is so important, keep business cards and contact information in an organized manner.
# Get help. Consider working with a lawyer who can help you with necessary, and sometimes complex, legal matters. You should also contact your insurance agent to make sure you have appropriate coverage.
As soon as you start spending your own money, it’s time to start tracking your spending so that you can create and follow a personal budget. Tracking your spending, while sometimes tedious, is the best way to find out exactly where your money is going.
The simplest way to track your spending, especially your cash, is the low-tech way, with a notebook and a pen. By carrying around the notebook with you, you can track exactly where every dollar is going–from a small coffee on your way to work to a spending splurge at the mall. If you’d prefer, on a daily or weekly basis, you can transfer your handwritten notes to a computer spreadsheet.
Once you have collected information for about a month, you’ll have a good baseline of information to use to create your personal budget. Some major categories that you’ll want to include are housing, utilities, insurance, food (groceries and dining out), gasoline, clothing, entertainment, and “other”. Using a spreadsheet program (such as Excel), online service, or other personal finance program, add up the expenses that you’ve been tracking, and then calculate what you’d like to budget for each category. Keep in mind that you’ll need to budget for some items, like gifts and automobile repairs, which will be necessary but won’t occur every month. You can either create a budget for each individual month, with variances for irregular expenses (e.g., heating expenses which will be higher in winter months, or car repairs and gifts), or a standard monthly budget where you include an average amount for expenses such as car repairs, heating, and gifts.
Your budget should also contain some personal savings amounts for retirement savings, college savings, an emergency fund, long-term savings, and any other savings goals you may have. Don’t wait until the end of the month to see what’s left–budget for your savings first.
Creating the budget is a good first step, but the most important thing is to follow the budget. Make time weekly or monthly to track your spending, and start to see if you are actually keeping to your budget. Using a personal finance program or an online service is probably the easiest way to do this on an ongoing basis, but make sure you continue to track where your cash is going. You could also use this simpleBudget Worksheet. You may be surprised to find out how the frequent small amounts you spend actually add up to big money.
After tracking your personal budget, you may notice some areas where you’ll have to make changes. Don’t just increase your budget without considering alternatives. While you may have no choice, if prices or expenses go up, shop for better deals before giving in to the extra expenses.
# How should I track my personal spending?
The simplest way to track your spending, especially your cash, is the low-tech way, with a notebook and a pen. By carrying around the notebook with you, you can actually track exactly where every dollar is going—from a small coffee on your way to work to a spending splurge at the mall. If you’d prefer, on a daily or weekly basis, you can transfer your handwritten notes to a computer spreadsheet.
# What financial reports should my family have?
Each family should spend some time tracking their financial progress, and the best way to do that is to develop a few financial reports that you’ll update monthly or semi-annually. These reports include a family budget and a balance sheet.
# When do I create and update my personal budget?
Individuals should start budgeting and tracking expenses as soon as they begin their first full time job. Revisit your budget every few months, and whenever significant life changes occur, such as raises, marriage, the birth of children, and divorce.
# What financial professionals should I consider working with to help manage my personal finances?
If you find that you need help with your finances, professionals such as tax advisors, credit counselors, financial planners, and lawyers can help. Before working with any financial professional, be sure to check their credentials. You may choose to ask your friends and family if they have any trusted financial partners that they recommend. Ask specific questions about their history and areas of expertise. Finally, be sure that you are comfortable with the advisors you choose; ideally, you will be financial partners for life.
# Why is a personal balance sheet important?
A balance sheet calculates your net worth by comparing your financial assets (what you own) with your financial liabilities (what you owe). The difference between the two is your personal net worth. Don’t be discouraged if your net worth is negative—keep in mind that this should be an accurate depiction of your financial situation. Setting goals is much easier once you know what your current net worth is.