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Your Guide to Better Credit
Taking on credit and credit cards can be a difficult. It can be even more confusing to decipher what does and does not affect your credit. In this piece we will outline the best ways to build your credit from scratch and ways you can repair your credit after a credit mistake.
Always Pay Your Bills on Time
The best way to start or repair any relationship is show up on time. The same goes for starting your credit relationship. According to Experian, one of the three credit agencies, “Your debt payment history accounts for 35% of your FICO® Score and is the most important credit scoring factor”. This includes the entirety of your payment history: on-time, late and missed payments.
In fact, one way to ensure on time payments is to set up auto-pay through your credit card provider, that way you can be sure you are paying towards your monthly balance.
Keep Your Credit Utilization Low
When it comes to revolving credit products like credit cards your instincts might tell you that the best thing to do is get as close to your credit limit as possible before paying off the balance. In reality, the best thing to do may seem counterintuitive. According to the Consumer Financial Protections Bureau, “Experts advise keeping your use of credit at no more than 30 percent of your total credit limit… paying off the balance in full each month helps get you the best scores and keeps you interest costs as low as possible.” Behaviors like low credit utilization and paying off the balance in full at the end of each month demonstrates to lenders that you’re responsible and avoids interest charges.
Avoid Opening Too Many Accounts at Once
Each time you apply for a credit card or loan something called a hard inquiry is made. This can temporarily lower your credit score because opening multiple accounts in a short period can signal risk to lenders. Instead, try to space out applications and focus on building a solid history with one or two accounts.
Become an Authorized User
If a family member or trusted friend has a credit card with a good payment history and low balance, ask if they will add you as an authorized user. This allows their positive credit behavior to appear on your credit report, helping you build credit faster.
Diversify Your Credit Mix
Having a mix of credit types like a credit card, auto loan or student loan can slightly boost your credit score. It is important to note thought, don’t take on debt just to improve your mix. Focus on managing the credit you already have responsibly.
Don’t Close Old Accounts
The length of your credit history matters. Even if you no longer use an old credit card, keeping it open (as long the account doesn’t have high fees) can help your score by increasing your average account age and total available credit.
Check your Credit Reports Regularly
Errors on your credit report like incorrect account information or fraudulent activity can drag down your score. You are entitled to a free credit report from each of the three major bureaus (Equifax, Experian and Transunion) every week at AnnualCreditReport.com.
Credit is a Marathon, Not a Sprint
Building and improving your credit score takes time, patience and consistency. There is no quick fix but by following these best practices, you will be well on your way to a stronger financial future.
Remember:
- Pay on time, every time.
- Keep your balances low.
- Monitor your credit reports.
- Be strategic about new credit.
For more information on how to better understand your credit score click the button below.