Working on your credit opens up a world of financial opportunities. Good credit helps you secure better financing in the future, which includes home loans, car loans, and better rates on credit cards. The best time to start improving your credit is now so that you can have as many opportunities as possible in the future.
Credit score calculations can be a bit complex, however, there are a few factors that have a larger impact on your score. These factors include:
- How much available credit you have access to (your credit card limits)
- The number of accounts you have and how long you’ve had them (the longer the better)
- How much of your credit you’re using (using too much without paying it down can have a negative impact)
- The frequency of credit inquiries you have (too many inquiries can make it look like you’re strapped for cash)
- Whether you make your payments on time or not
How to Build Your Credit
Working on your credit doesn’t have to be difficult either. A lot of credit building happens in the background, over time. Here are some tips to help you get the most impact as you build your credit score.
1. Set It and “Forget It”
Making your payments on time is one of the most important actions you can take to keep your credit score in good standing. After all, a credit score measures your “trustworthiness” so that lenders know if it’s a good idea to give you money. Whether you actually make payments is a pretty crucial data point.
Enrolling in auto-pay can help you to keep your “on-time” payment status at 100%, especially if you struggle to remember. While it’s important to pay down your balance, even making the minimum payments is going to have a positive impact. The alternative is late payments, which can have larger negative implications. So, making sure you never miss a payment is a good habit to adopt.
2. Keep Old Accounts
If you’ve had problems paying down your debts, you might be tempted to get rid of old credit cards you no longer need. It may even feel symbolic to take a pair of scissors to a particularly tempting credit card. However, it’s wise to keep the gesture “symbolic.” In other words, get rid of the card, but don’t close accounts you have, even if you think you’re done with them. The reason is that credit bureaus actually like to see that you have “old” accounts. Keeping your credit cards, even if you don’t use them anymore, can give you a small boost in your score.
3. Avoid Opening New Lines
On the other hand, credit bureaus may flag you if you’re suddenly opening new accounts and making lots of inquiries on your credit report. This can signal that you’re strapped for cash and looking for quick access—even if that’s not what you’re doing. It’s best to keep credit inquiries to a minimum, and only inquire if you truly need a new account.
4. Pay Down Your Balances
Another efficient way to boost your score is to pay down your debts. Credit bureaus like to see that you’re not overextending yourself financially. The more debt you have racked up, the more your credit score is weighed down. Not to mention, you’re going to be paying a lot more interest, and your minimum payment will increase to reflect that.
Try adopting one of the debt reduction methods, such as the debt snowball or the debt avalanche to pay down your balances over time. The snowball method, for example, encourages you to put as much of your budget as possible toward your smallest balance. Until it’s paid off, you make minimum payments on all other accounts. Then you tackle your next smallest balance, until you’ve paid everything down. The debt avalanche is when you focus all of your available budget on your highest interest rate balance, while making minimum payments on all else. Either scenario can help you make more dedicated progress toward debt reduction, and your score will improve the more you pay off. (Just make sure you’re not using those cards and running them up again, which means not over-extending your budget.)
5. Increase Your Limits
This suggestion can be a slippery slope. Increasing your credit limits can be a simple way to boost your credit score. For starters, increasing the credit you can access boosts your score. This is because credit card companies often do this as a show of faith. When you prove your trustworthiness to them, they can increase your credit line. This signals to credit bureaus that you’re trustworthy. Secondly, increasing your credit line will decrease your credit usage percentage. For example, if you had a $1,000 credit line, and had a $500 balance, that’s 50% utilization. If your account limit then increases to $2,000, you’re now only using 25% of your available credit. That can give you a pretty good boost.
But here’s where the slippery slope comes in: many people tend to see their credit increase as a license to spend. Especially if the increase is drastic, as it can often be. This leads people to run up their credit cards and actually negatively impact their scores instead. This also tends to have a negative financial impact, because your interest charges increase, as well as your minimum payments.
All in all, good credit is built over time. So long as you make your payments on time and keep your credit usage relatively low, you can position yourself to improve your score significantly over time.