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After building great credit, here are the next steps

Erica Sandberg

October 27, 2014

QHi Erica,

In 2013, I visited CreditCardGuide.com to get a credit card for my very bad credit. I am pleased to say that I got one, no problem, even though my scores were less than 500. I have been doing well with this card (secured by the way), and I went from a credit limit of $300 to one of $1,500 without even asking.

Erica, I never keep a balance, just as you said. Not once have I paid interest. I'm now in the market for a car, so I checked my score and was shocked to see that it is 762, high enough to get the car with best financing.

Questions: Should I apply for a better credit card (the one I have has a $39 annual fee plus $300 down) and get a new one instead? Will a car loan push my score down? If it does, should I apply for the new card before I get my loan? Thanks for your answers. –William

ADear William,

Bravo! I could not be more thrilled that you've done what it takes to convert an anemic credit score into such an impressive one. Presuming you are accessing FICOs (the most commonly used credit scoring system), the numbers you've achieved fit firmly in the excellent range, which is anything in the mid-700s to the maximum of 850. And yes, they should help you qualify for premium credit cards and loans.Ask Erica

If the credit card that you have now is still working for you just fine, I see no reason to shut it down as the annual fee is fairly low. In fact, the longer it's active and in positive standing, the more it will benefit your scores. However, if you choose to close the card, the positive activity will remain on your credit reports for up to 10 years. FICO takes into consideration length of credit history as well as the types of credit in use. Keeping this card or closing it and you'll cover the first, and add another product to your borrowing repertoire and you'll fulfill the second. These actions will complement what you already must have been doing, which is charging regularly, paying on time, and maintaining a low to zero balance — the most important factors in FICO score development.

Should you pursue another credit card before or after applying for vehicle financing? I would get the car loan first. According to MyFico.com, FICO scores ranging from 720 to 850 should be enough to make you eligible for a loan APR of 3.19 percent (based on a loan amount of $10,000 and 36 monthly payments), the lowest national average rate. Of course, your down-payment and other personal finance details matter to a lender, too, but this is a realistic interest rate for you. Lock in a low rate on a car before you do anything that could change it.

Because you're taking on debt when you obtain a car loan, your credit score may drop a little temporarily. However, after you begin the repayment process, the monthly installments that you send in on time that also steadily decrease the balance will cause those digits to rebound.

Wait about six months, then check your FICO scores again. As long as you've continued to treat your credit card and car loan responsibly, they ought to be in great shape. Since you've shopped for credit cards before, you understand how it works. Check out the credit cards that are in your credit scoring category. In your case, that will be those that require excellent scores.

What are you going to look for in a new account? That depends on your lifestyle. Almost all of the better products are rewards-driven, meaning they are equipped with the ability to earn points transferable to money, goods and services, as you charge. For example, you may want to focus on cashback cards. With them, you get rebates just for charging. If you never hold a balance, the issuer pays you! If travel is in your future, one that offers deals on airlines, hotels and car rentals may be preferable, but those usually come with higher annual fees.

Once you've identified a card that suits your needs and that you'll probably qualify for, apply and wait. Chances are you'll get it.

At that point, you'll have two credit cards. You can close the secured card now if you're tired of paying the annual fee. Use your card(s) occasionally, while paying that car loan down. Keep doing what you've been doing, and pay the credit card bills in full and on time each month. With this plan, not just your credit scores but your overall financial health will remain robust.

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