Via LearnVest By Bethy Hardeman of Credit Karma ~
For most people, thinking about their credit–and trying to improve it–usually isn’t a rollicking good time.
But your credit is so important that when you do need it–say, when it’s time to buy a house or a car–you’ll really wish that you had given it some thought.
After all, having a good credit score can save you thousands of dollars.
Your credit report tells the story of your financial history, from how many open and closed credit cards you have to how you’ve repaid your debts. (Learn how to get your credit report.) Plus, the information in your credit report boils down to a three-digit number that helps lenders decide whether or not to approve you for a loan or credit card. That’s called your credit score. (Find out how to improve your credit score.)
If you’ve reviewed the basics, you probably know these things already. But there’s a lot that the basics don’t cover, and questions that you might be embarrassed to ask, like how to start rebuilding your credit after a bankruptcy. We cover ten of the top I’m-too-chagrined-to-ask questions.
1. What can I do to start building credit if I don’t have any credit history?
A great first step is to get a secured credit card. You’re essentially guaranteed approval for a card like this, since it uses a cash security deposit from you as the basis for your credit limit.
Here’s how it works: When you’re approved for a card, you’ll be required to put down a security deposit, usually around $300 to $500. That deposit will then become your credit limit. Secured credit cards report to the credit bureaus, which means that you’ll still be able to build credit–without risking getting too deep into debt. After you’ve proven you’re responsible with a secured credit card, many issuers will transfer it to an unsecured card, and increase your credit limit, which can take a year. Here’s a list of secured credit cards to consider.
2. How does closing a card affect my credit?
It depends. If you only have one credit card, it’s likely a bad move: Closing that card could mean that you won’t have a good mix of credit, which is something that lenders like to see. Also, closing it will deplete your available credit, which isn’t good–having unused, available credit helps your score.
But if you have several credit cards, closing one might not be so bad. It all depends on how high the limit is on the card, and something called the credit card utilization rate–the percent of available credit that you’re using. If your available credit is $10,000, and you’re using $8,000 of it, it could indicate that you rely heavily on credit because you lack cash. It’s best to keep your credit utilization rate below 30%.
As a general rule, the higher your credit utilization rate, the more it might hurt your score to close a card. For instance, if your other cards are maxed out or close to it, closing a card with a high limit could hurt your credit score, because it could boost your credit utilization rate. For example, let’s say that you have $5,000 worth of credit, and you are using $3,000 of it. If you close a credit card with a $1,000 limit, you’ll boost your credit utilization rate from 60% to 75%. So to make certain that closing your card won’t have a severe effect on your credit score, calculate your credit utilization rate without the limit on the card. If it’s below 30%, it’s probably safe to close the card. If not, take some time to pay down your debt first.
3. Will having too many cards hurt my credit?
It’s not the number of credit cards that you have, but how you use them. You could have lots of credit cards and still have great credit—or you could just have one or two and maintain a great credit score. (Check out this infographic that shows how folks with higher credit scores actually have a higher number of credit cards.) Just remember that the more credit cards you have, the more risk you take on of missing a payment. Your credit will benefit as long as you keep up with your monthly payments, but you still need to be careful not to charge items that you can’t pay off each month–that’s an easy road to credit card debt.
4. Does getting married affect my credit?
Tying the knot doesn’t result in a combined credit report or score. You and your spouse will retain separate credit files. However, as a married couple, you may decide to apply for credit jointly at some point. In this case, your two credit histories will work together to determine your rates in a process called co-signing. So if one spouse has significantly poorer credit, it could put you in a different credit range (i.e. “fair” instead of “good”), and give you higher interest rates. Plus, a loan default will affect both credit reports negatively. But the upside is that both of you will receive credit-building benefits from the new loan once you’re approved.
LearnVest is the leading lifestyle and personal finance website for women.