Some people are probably going to find this post to be offensive. No, I’m not going to go on a profane rant or anything. Today I want to talk about building your credit.
Credit is a Four-Letter Word
I am a strong believer that people do not understand the value of having access to credit. You will find a seemingly endless stream of personal finance bloggers who will cram the notion that you don’t need credit down your throat…and they are right in many cases. Most people do not use credit properly anyway, so it’s not shocking that people will dispense advice telling you to avoid using credit at all costs.
That might work for some people, but not all people…and certainly not people who are trying to build long-term passive wealth.
Let’s look at it this way: if you want to buy a rental property, odds are you are going to need good credit.
What is credit?
Simply put, credit is buying power. It’s money that is given on good faith that you will return it (with interest, of course).
Most people use credit incorrectly. They buy things that they don’t need. Sometimes people use it to help get them from one paycheck to the next, which makes it really hard to catch up (or at least it feels that way). I’m guilty of both of these things, as most of us are.
Bad credit really, really sucks.
So why would anyone want credit? Because it’s easy, convenient, and if used correctly it can make you more money. More money is good, right?
Here’s how to build a good credit score.
First, you are going to want to check your credit score. I would use the free annual report for starters – it will at least let you know where you stand at no cost. Second, you’re going to want to monitor your credit. This is actually become far easier because of sites like Credit Sesame, which is a free site that helps you keep track of your credit health.
If you don’t have open credit lines, you’re going to need to open some. Usually the easiest way to start a credit history is to get a credit card. There are tons of offers out there, but you MUST pay attention to the terms of the card.
My rules are this: there must be NO annual fee, and a reasonable interest rate. That’s it. But for me, not having an annual fee is the big one.
Make your payments on time.
Not late. Not two days late. On time or early. NO EXCEPTIONS. Even if you can’t afford to pay off the balance of your card, make sure you get the payment to the lender on time. I cannot emphasize this enough. If you can pay off your balance every month, then do so, but do it on time.
Don’t overextend yourself.
If you can’t afford the monthly payment, you shouldn’t even bother with building credit. Instead, you should build your income. If you can negotiate a pay raise at your job, then you can try to do that. Another easy way to get the extra money to afford to start building credit would be to pick up some kind of side hustle that brings in some extra income. Most credit cards with smaller limits have pretty easy to manage monthly payments, so if you can find a way to make an extra $100 per month then you should be okay.
Once you have established your credit, you can use it to invest in things that will generate additional monthly income. It might take a long time to get to this level, but if you don’t overextend yourself and keep your payments on time and your balances low, then you will build your credit to the point that you can do amazing things such as investing in real estate through rental property (which pays for itself if you do it correctly).
Don’t be afraid of credit.
I can’t emphasize this enough: most people are just afraid of credit because of all of the horror stories about debt. That’s fair to a point, because if you don’t know how to properly use it, then you shouldn’t even attempt to try. But if you apply some basic math and common sense, then you should have no reason to fear using credit to reach your goals.