The good news is that once you understand how credit works, building your score is about consistency. Whether you’re starting from scratch or trying to repair a damaged score, these practical tips can help you build a solid credit history.
How Does Credit Work?
A credit score is a numeric summary of your borrowing activity, measured on a scale from 300 to 850. When you apply for a rental, property managers check your credit report to assess whether you’ll be a trustworthy tenant who pays rent on time.Each of the three credit bureaus—Experian, Equifax, and TransUnion—have unique algorithms to calculate credit scores, but they all consider the following factors:
- Payment history
- Credit utilization ratio
- Credit mix
- Credit age
- Frequency of credit applications
- Negative marks like collections or bankruptcy
What is a good credit score?
Each lender and credit bureau has a different definition of what a “good” credit score is, but they typically follow these ranges:- 800+ = Excellent
- 740-799 = Very good
- 670-739 = Good
- 580-669 = Fair
- 579 and under = Poor
7 Tips for Building Credit
If you’re not sure how to start improving your credit score, here are some tips to get you started.
Review your credit report
You can’t fix what you don’t know about. Your credit report is the detailed history of your borrowing behavior, and it serves as the basis for your credit score. Errors happen more often than you might think—an old account marked as open when it’s closed, or a payment marked late when it was on time.Make it a habit to check your report regularly. By law, you are entitled to a free copy of your credit report from each of the three major bureaus every year. Look for inaccuracies in your personal information, account status, or payment history. If you find an error, dispute it immediately. Cleaning up mistakes is often the fastest way to see a jump in your score.
Make payments on time
Perhaps the most important factor in building good credit is paying your bills on time. Payment history makes up a large portion of your credit score, and even one late payment can have a negative impact and stay on your record for years. Consistently making timely payments shows lenders you’re a responsible borrower and helps your credit score increase.Start by paying down any existing debt and pay your credit balance in full every month. Set up calendar reminders for each bill’s due date or enroll in automatic payments through your lender. Double check that you have enough funds in your account to avoid overdraft fees and contact your lender as soon as possible if you anticipate having trouble making a payment.
Keep your credit balance low
One of the biggest factors in your credit score is your credit utilization ratio, or how much you owe compared to how much you could borrow. A low credit utilization rate shows lenders that you know how to manage credit responsibly, while a high credit utilization rate suggests that you borrow more than you can pay back. A good rule of thumb is to keep your utilization below 30%.For example, if you have a card with a $10,000 limit and you have a $5,000 balance, your credit utilization ratio is 50%; you look like a risky borrower to lenders. To maintain a healthy utilization ratio on this card, you would have to keep your balance under $3,000.
Ask for a credit increase
If you’ve been a responsible cardholder for a while, you can ask your credit card issuer to increase your credit limit. This is a strategic move that helps your utilization ratio.Using the example above, let’s say your credit limit increases from $10,000 to $15,000. If you have a $3,000 balance on that card each month, your credit utilization drops from 30% to 20% after the credit increase.
Keep old lines of credit open
If you finally pay off an old credit card you don’t use anymore, your instinct might be to close the account to “tidy up” your finances. Don’t do it!The length of your credit history matters. A card you’ve held for 10 years proves you have a long track record of managing credit. If you close that account, you shorten your average credit age, which can hurt your score.
Additionally, closing that card reduces your total available credit, which could spike your utilization rate. Keep the account open and use it for a small recurring subscription just to keep it active.
Open new lines of credit only as needed
It can be tempting to open store rewards cards to get a discount at the register or to sign up for several credit cards at once. However, every time you apply for credit, a hard inquiry is placed on your report and will drop your score by a few points. One inquiry every six months or so won’t ruin your score, but several in a short period can cause a significant drop.Multiple applications in a short time frame suggest to lenders that you might be in financial trouble or desperate for cash, which makes you a risky borrower. Be selective about when and where you apply for credit.
Seek credit counseling
If you feel overwhelmed by debt or confused about where to start, you don’t have to go it alone. Non-profit credit counseling agencies can be a fantastic resource.A certified credit counselor can review your finances with you, help you create a realistic budget, and sometimes even negotiate with creditors on your behalf to lower interest rates or waive fees. Seeking help isn’t a sign of failure; it shows you’re taking serious steps to regain control over your financial future.
Building credit is a marathon, not a sprint. By creating good financial habits and staying patient, you’ll gradually build a credit history that opens doors rather than closing them.
This article was originally published on April 20, 2016, by Stever Berto Bertolacci.
