A good credit score will open the door to many opportunities. You will be approved for more credit, loans, and mortgages and get them at lower interest rates. You may avoid paying deposits for utilities and mobile phones and even get a better rate on your auto insurance.
Maybe you’re just beginning to build a credit history but haven’t given it much thought. You should know that good credit doesn’t just happen. You need to make it happen. Fortunately, there are things you can do to not only create a credit score but establish a solid one. Here are four tips you can use.
1. Establish Credit with a Secured Credit Card
Some people have an aversion to credit cards. That’s understandable considering how quickly you can drive up the balance if you’re not careful. But you can’t build credit without using credit. This may seem a bit of a Catch-22 for those who shy away from using credit cards.
If you worry that you might have trouble controlling your use of a traditional credit card, there’s another way. A secured credit card gives you all the advantages of a credit card with less risk.
With these cards, your credit limit is set by the amount of money you deposit into the secured account. If you deposit $1,000, that’s your credit limit. Using the card and paying your bill on time will get reported to major credit bureaus.
Your payment history makes up 35% of your score. So be sure to pay on time each month and, ideally, pay off your full balance when possible. Doing so will help you receive high marks and move you toward establishing a solid score.
2. Use Credit Sparingly
Comprising 30% of your credit score is your use of the credit you have, also known as credit utilization. Keeping the amount you use at any one time under 30% is key to a good credit score. That means having credit available is good, but using too much of it isn’t.
For example, say you’ve been approved for a $20,000 car loan and three credit cards, each with a $10,000 limit. That means you have been entrusted with $50,000 in credit. You should use less than $15,000 of it at any one time to keep your credit utilization in good standing.
If you needed that $20,000 to buy a car, you can see that you need to pay the balance down quickly. At the same time, you need to avoid using your credit cards to hit that 30% use target. It will take a while to reach that debt-to-income ratio but you should remain vigilant about trying.
As you pay down your debt, watch your credit score rise. Of course, having credit available allows you to buy things you otherwise can’t afford. Just make sure you keep your eye and your goals focused on that 30%.
3. Mix It Up
Credit scores factor in your mix of credit to the tune of 10%. You’ll need to have both revolving credit, such as credit cards, and installment credit, such as loans. If you have a student loan or auto loan, you have the installment credit covered. If you have either of them, you likely have significant debt. But this credit is great for your payment history, especially if you have payments automatically debited from your checking account.
Installment loans can be great for your payment history but keep your eye on your revolving balances. Because credit cards essentially allow you to repeatedly borrow against your limit, those balances affect your score more. Establishing a solid score requires using little revolving credit and paying off balances monthly if possible.
If you currently have credit card debt, pay it off first to raise your score. Once you do, you can pay down installment debt faster by making extra payments on the principal. The mix, timely payments, and debt-to-credit ratio makes up a whopping 75% of your score.
4. Let Your Credit Accounts Age with You
So many things improve with age, like fine wine, a great cut of beef, and a pair of leather boots. Your credit score can improve with age if you leave old and unused accounts open. The length of your credit history accounts for 10% of your credit score.
You may think it’s smart to close a credit card account once you’ve paid off the balance. That way, you won’t be tempted to use that card again and find yourself in deep debt. Although it’s wise to resist that temptation, leaving the account open speaks to the age of your credit.
Old unused accounts also speak to your debt-to-credit ratio. That $3,000 limit on your first credit card adds to the amount of credit you’ve been approved for. If there’s no balance on the card, your ratio looks healthier.
Some people worry that an open but unused credit card account is ripe for fraudulent use. Just keep your eye on those accounts and set up notifications to signal use right away. At some point, the lender will close the account, but it will age your history in the meantime.
Establishing a solid credit score requires a concerted effort on your part. Just remember that a strong score will provide tremendous benefits down the road. You can get better payment terms and lower interest rates. The lowest interest rate possible on a mortgage will save you thousands over the life of a loan.
Use your credit wisely and strategically for the things that truly matter. Then sit back and watch your score blossom.
