How to Build Credit Before You Buy a Home or Make Another Major Purchase – Part 4

I’m excited about this week’s lesson in How to Build Credit Before You Buy a Home or Make Another Major Purchase! In fact, this is among the most important lessons in my entire book, 7 Steps to a 720 Credit Score.

Step One of my book is: Keep your credit card balances under 30 percent of your credit limit.

As you are learning how to build credit, your balance on any one credit card should not be more than 30 percent of your limit. For instance, if you have a $1000 spending limit on your Discover card, keep your balance at no more than $300, even if you pay your credit cards in full each month. The debt you carry on a credit card in proportion to your balance is called a “utilization rate,” and credit bureaus respond more favorably if your utilization rate is low.

If your utilization rate is too high, do one or more of the following:

1. Transfer balances so that each card has a 30 percent balance or less; and/or
2. Pay your balances down to 30 percent; and/or
3. Call your credit card company and ask it to increase your limit so that your balance is less than 30 percent; and/or
4. Call your credit card company and ask it to lower your interest rate so that your balance stops climbing so quickly; and/or
5. Open another credit card account and transfer balances accordingly (but be sure to refer to part 3 of our series on how to build credit before you buy a home or make another major purchase). Remember, you never want to have more than five credit cards.

Okay, so let’s talk reality for a minute. If you are able to implement these strategies, fantastic! But if you are like a lot of people, you are struggling right now to make ends meet, much less pay your debt down. If you are in this scenario, I offer two suggestions to help you learn how to build credit:

1. Attend my free teleseminar, which will help you learn how to build credit and how to negotiate with the banks for lower interest rates.
2. Keep your balance as low as possible on as many cards as possible. If you cannot achieve a 30 percent utilization rate, shoot for a 50 percent utilization rate.

Now let’s talk about credit cards with no preset spending limit, such as many American Express cards. On these cards, credit bureaus report your credit limit using the highest balance you have ever had on your credit card (called the “high credit limit”). This throws your utilization rate out of whack if you generally spend the same amount from month to month. To avoid exceeding your target utilization rate on these cards, you can try this tactic: Spend one month “hiking up” your balance as high as possible, thereby increasing the high credit limit to a high enough mark that you do not exceed the 30 percent utilization rate in subsequent months. Of course, your credit score will take a hit during this month, but if you are not planning on making any large purchases in the next few months, this strategy will be well worth the temporary setback to your credit score.

And finally, remember that you must always check the limits that the credit-scoring bureaus are reporting. Part 2 of my series—How to Build Credit Before You Buy a Home or Make Another Major Purchase—discusses this in full.

Come back later this week for Part 5 of my eight-part series: How to Build Credit Before You Buy a Home or Make Another Major Purchase!