Credit building requires, without a doubt, a long term plan and determination in order to be effective over the long term. However, many people don’t realize that the long-term nature of credit building is not just an exercise in self-restraint, but a factor that is considered in evaluating a credit score itself.
Specifically, FICO scores take both time and moderation into account as positive factors when building credit. As credit builders, this is important to us, because it means that we can reduce the costs of our major debt goals by planning far in advance, and approaching them from a disciplined financial plan.
From the perspective of a lender, an individual who has a longer history of dealing with credit instruments will have a greater probability of paying off their debts than an individual who has only recently begun borrowing.
Granted, the age of a credit file will only have an incremental impact on the final credit score itself, the difference can be enough to save a few thousand dollars off of a later mortgage, meaning that planning ahead is well worth our time. From there, it is important to remember to space out applications throughout reasonable intervals, so that to ensure that an impression of over-aggressive borrowing is not given.
The other incremental aspect of a credit score than can have an impact on a final credit score is moderation. Specifically, every time a borrower applies for a new credit product they exhibit what is known as credit seeking behavior. While credit seeking behavior is, in itself, not necessarily a bad thing, it compounds with each additional application, and can act as a barrier if not planned for.
The rationale behind this segment is in place to prevent individuals from applying for multiple loans at different institutions all at once, and reflects the fact that debt is usually a last resort, which suggest that people who are in the process of borrowing are not as able to pay off their debt as they would be if they did not explicitly need the debt in the first place. But if it’s the case that even just applying for a loan will hurt our credit score when we need it most, how are we ever supposed to be able to secure credit in the first place?
The best way to maximize the benefits of time and moderation in a credit score is to build up a solid financial plan that spans over a period of approximately two years. By borrowing early in that two year period, and then using the proceeds to aggressively build credit, a saver can establish strong long-term credit in time for a future goal, as opposed to finding themselves in need of funds at the last minute.
The trick is to borrow early, and create access to funds before they are actually needed, so that when a major credit goal is reached, the benefits can be reaped through the more serious aspects of the credit score.
