Building and Maintaining Good Credit Rating

Over the years, the percentage of cash transactions has steadily declined and your purchasing power is now mostly determined on your ability to raise credit. Therefore, bad credit not only impairs you financially but also psychologically as your purchasing power drops sharply. Building and maintaining good credit rating is important as it sends vital signals about your reliability, responsibility and dependability to your creditors, employers, landlords, marketers, insurance companies, mobile phone operators, etc. The good news is that with little planning and care you can build and maintain a good credit rating. Understanding how a good credit history is established and maintained will help you avoid some of the pitfalls that lead to bad credit.

Building a credit history

If you are a new player in the credit market and do not have a credit history, you need to build one. A good credit history is built gradually through responsible use of loans, credit cards and other credit instruments. There are "three Cs" to good credit rating:

• Character: Your "willingness" to repay
• Capacity: Your "ability" to repay
• Collateral: Your available "assets"

By using credit cards for your expenditures and paying the full billed amount on time, you can demonstrate your willingness to repay loans and establish a good credit standing. Some of the tips to build your credit rating are:

• Start with gas cards. Get 1 or 2 gas cards and use them for all your gasoline purchases. Pay the full amount of your card bills well in advance and continue doing so. Since gas credit cards are relatively easy to obtain, they are a good start.
• Put your house and utility bills in your own name and pay them on time to establish good credit history under your own name.
• Pay other bills such as rent, taxes, mobile phone, insurance, cable etc. on time as your credit report may contain information on any late- or non-payments for these bills.
• Budget your expenses and stick to that. Inculcate habit for small savings.

The above four steps will help you to establish a credit history. Once you have established some credit history, apply for a secured credit card. Pay all your expenditures with your secured credit card and ensure that you clear the credit card dues well in time and in full. Continue to do so for next 6-12 months. After about a year, when you have enough credentials on your credit report, move on to credit card with more attractive terms and features. Close all your retail, gas and secured cards.

Maintaining a good credit history

Establishing a good credit history is just the beginning. It is necessary to maintain it to enjoy the rewards of good credit rating. Maintaining your credit rating is managing your money. Some tips to maintain your good credit rating are:

• Financial Planning: Make a personal financial plan for yourself. Stick to this plan and have periodic reviews to avoid frequent contingencies or fire fighting. Open checking and saving accounts to show stability and maintain significant balance in them. The deposit accounts will also provide you cushion to meet any contingencies.
• Financial Discipline: Avoid approaching creditors frequently as it may be misinterpreted as a sign of bad or poor credit situation. Avoid debt over burden. Reduce your debt burden by closing unused credit card accounts and consolidating your balances. Always, if possible, pay off some outstanding loans. Keep only a few credit cards (3-4 maximum). Having too many credit cards may affect your credit rating. Use your credit cards well below the credit limit. Touching the credit limit too often can impact your credit rating. Avoid using one credit/loan to pay off other credit/loan.
• Repayment discipline: Show discipline in repayment of all your obligations such as credit card bills, loan repayments, rent bills, mortgage payments, utility bills, service/product bills, taxes, etc. and build a character for yourself. At least pay the minimum amount due well before the payment date, if you are constrained to pay the full bill. In case you miss any payments, pay them as soon as you get notice/reminder from the creditor and get all your accounts up to date.
• Responsiveness: Dont ignore any notice/reminder from the creditors regarding late payment or non-payment. Contact them immediately to resolve the problem. Communication with
• Debt consolidation: Small minimum monthly payments required for each credit instrument generally adds to a large figure. By consolidating your debt, you can reduce your monthly payments substantially and can easily avoid the bad credit problems. In general, debt consolidation loans also carry a lower interest rate, thus you will save substantial amount on the total cost of the loan itself.
• Periodic review: Review your credit report periodically and report any errors immediately to the credit bureau for correction.
• Seek help: If you feel that the things are getting out of your hands, seek help from your creditors to extend the date of repayment or restructure the terms of your credit. Take help from qualified credit counselor to help you better manage your debts.

Overall, understand your credit report and figure out where you stand. Plan according to your credit bearing capacities. Build your character to establish and maintain a good credit history.