Applying for credit is a necessity these days because it is a tool that helps you build a good credit history and purchase things that you may not have been able to buy before, like a car or a house. But the truth is, most people don’t know how to handle their finances and spend too much money on things they can’t afford. In such a competitive financial environment, getting approved for a loan can be a challenge.
To get you started on the right track, we’ve compiled a list of things you should know before applying for credit to help you improve your credit score and increase your chances of getting approved for a loan. Read on to learn more.
You Have a Big Impact on Your Credit Score
You may be reluctant to take full responsibility for your credit score, but the truth is, it’s largely down to you. The factors your credit score is based on include your payment history, how long you’ve been a responsible borrower, and the types of credit you’ve applied for.
If you’re willing to take on more risk, you may be able to increase your score by making improvements to your credit report, like dispute any inaccurate or incomplete information or get a credit monitoring subscription.
If you’re looking to buy a house or car in the near future, you’ll want to make sure you have a good credit score. A credit score between 650 and 699 is generally considered good credit, and a score between 700 and 749 is excellent.
If you’re unsure where you stand, you can check out our credit score tool to get a better idea of where you stand and what kind of impact you have on your credit score.
You Need Good Credit
Credit is a tool that allows you to purchase things that may not be available to you if you didn’t have credit, like a car or house. But the truth is, you don’t need a ton of credit to get by. In fact, the average American household only has about $2,000 worth of credit on file at any given time.
Only a small percentage of people are actually in debt to the tune of $1,000 or more, and most of us are somewhere in between. So while having bad credit is better than having no credit, it’s still a good idea to strive for good credit and to make a plan to improve your score.
There are a few different ways to get good credit. One is to pay off all your credit cards with a balance, and the other is to get your credit score high enough that you are accepted for the type of credit you want, whether that’s a car loan, mortgage loan, or even a store credit card.
You can check out our guide to improving your credit score to learn how to approach it from multiple angles.
Check Your Credit Score
Once you’ve got a good idea of where you stand, you should look into checking your credit score to ensure there aren’t any issues. Credit scores are determined by a formula that takes into account your credit report, payment history, and how long you’ve been a responsible borrower.
Your credit score is an indicator of the likelihood that you’ll be able to repay your debt according to the terms of your loan. A good credit score means you have a good chance of being approved for a loan, like a mortgage loan, and that loan will likely be at a favorable interest rate.
Good Credit Isn’t Enough
Credit is no guarantee that you’ll be approved for a loan, regardless of how good your credit score is. Whether you’re applying for a mortgage loan, a car loan, or even a store credit card, you’ll want to make sure you’re able to demonstrate that you have the ability to repay that loan according to the terms of the application.
This means you need to be able to show that you have the income to support the loan, that you have the income to make the payments, and that you have the means to repay the loan, whether that’s through savings or a guarantor.
For example, if you get approved for a loan for $300,000, you’ll need to be able to show that you have the income to support that loan and make sure you have the wherewithal to repay it.
You Need History, Not Just Credit
Credit is only as good as your history of making credit-worthy purchases. If you only have a history of taking out cash advances and paying them off quickly, you’ll have a hard time getting credit for larger purchases.
While credit reports do include data like your payment history and the types of credit you’ve applied for, it’s not the only data used to determine your credit score.
How long you’ve been a responsible borrower is also taken into account, so if you’ve only recently started applying for credit, you might have a hard time getting approved. The good news is that establishing credit after you turn 18 is easier than ever before.
Get a Grip on Debt
If you’re like most people and find yourself with a balance on your credit card, it’s time to get serious about paying off that card. Credit cards have interest rates that can quickly add up, and if you don’t pay off that card in full every month, you can easily end up in debt.If you have a lot of debt, it can also negatively impact your credit score, so it’s important to take action and get your debt under control.
Establishing Credit After You Turn 18
Even if you’ve got a ton of debt and a bad credit score, there is still hope. The best thing you can do is establish credit after you turn 18 by applying for a credit card.
One of the best benefits of getting a credit card after you turn 18 is that the credit card companies don’t care about your past credit history. They want to see that you have a solid credit rating and are likely to make payments on time.
The only bad thing about getting a credit card after you turn 18 is that the interest rate is usually sky-high, so make sure you’re able to pay the bill in full and on time every month.
Steps to Build Good Credit
Here are 6 quick steps you can take to apply and establish credit after you turn 18 and improve your credit score. Consider taking these steps as a long-term solution to help improve your credit score, rather than a short-term fix that will have to be repeated every time you need to open a new credit account.
Get a credit monitoring subscription – FICO scores are based on data from the past, so the best thing you can do to improve your score is to get a credit monitoring subscription and monitor your credit score on a regular basis.
Make sure you’re only applying for credit that you truly need – There’s nothing worse than applying for credit and seeing an approval for a loan, but then being unable to pay the bill according to the terms of the loan.
That’s a recipe for disaster, so the best thing you can do is to make sure you’re only applying for credit that you truly need and that you can actually afford to pay off.
Dispute any erroneous information on your credit report – One of the leading causes of poor credit score is incorrect or incomplete information on your credit report, so the best thing you can do is to call up the credit bureau that maintains your credit report and dispute any erroneous information.
Get your free credit score – Credit scores are based on data from the past, so the best way to improve your score is to get a free credit score check every month and monitor your credit score.
Make sure you’re making your payments on time – One of the best ways to improve your credit score is to make sure you’re making your payments on time.
It’s important to note that having a high credit score doesn’t mean you’ll be approved for every loan out there. In fact, most people with good credit scores don’t get approved for any loan at all because lenders look for more other factors