Your payment history makes up the biggest component of your credit scores. Paying your bills on time helps you build a solid foundation.Your credit utilization rate, which is the amount of revolving debt you have in relation to your available credit, can also have a major impact on your score. Keeping balances low is a good strategy.
1. Review Your Credit Reports
Your credit score is a number lenders use to determine how likely you are to repay debt. It also plays a role in the cost of loans, mortgages and insurance. A low credit score can make it difficult to borrow money and may even prevent you from getting a job or renting an apartment.Reviewing your credit reports on a regular basis can help protect you from identity theft and other financial fraud. Your credit report lists a history of your finances and includes account information such as the types of accounts you have, creditor names, balances and payment histories. The credit report will also include personal information like your name, address, Social Security number and date of birth.It’s important to check your credit reports on all three nationwide consumer reporting agencies (Experian, Equifax and TransUnion) before applying for a new loan or credit card. The credit bureaus and the businesses that reported the data to the credit bureaus are responsible for correcting errors in your report.
2. Pay Your Bills on Time
A record of paying your bills on time is the single most important factor in both FICO and VantageScore credit scores. If you’re not already on auto-payment or recurring payment schedules, consider setting up these options to help ensure that your bills get paid each month. Make a list of your bills and their due dates, or create a budgeting spreadsheet to help you keep track of the payments that are coming out each month. You can also set up an account with a digital banking company that will automatically sort transactions by payee, making it easier to monitor the status of your bills.Prioritize your expenses and allocate your income to the necessary bills first – those that keep your household running like mortgage or rent, car payments, utilities and groceries. You can also ask your landlord or utility companies to report on-time payments to the credit bureaus. Getting this type of positive mark on your credit report can give your score a modest boost, but it works best alongside other strategies that are designed to reduce your outstanding debt.
3. Keep Your Credit Utilization Low
The most important factor in your credit score is your payment history, followed by your credit utilization rate (the percentage of your revolving debt you’re using compared to the total of all your credit card limits). To maximize your credit scores, it’s best to keep your credit utilization below 30%.One way to do that is by lowering your overall credit limit. Just make sure you can afford to pay off your balance before requesting a higher limit, and try to do it around the 15th of each month so that your card issuer’s billing cycle ends before they report the new balance to the credit bureaus.Another option is to ask a financially responsible loved one to add you as an authorized user on their credit card. Having an authorized user with a positive payment history and low credit utilization ratio can have a significant impact on your scores, and it could help you get approved for loans and credit cards. While it may take time for the account to show up on your reports, if you continue making timely payments, you should see an improvement in your credit over time.
4. Keep Old Accounts Open
Lenders want to see that you have different types of accounts on your credit report. Credit card accounts, personal loans, and mortgages each have a different impact on your credit score and demonstrate that you’re capable of managing a variety of lines of credit. While having a mix of accounts may have a smaller effect on your credit score than other factors, it can still help you improve your credit score.Closing old accounts could lower your credit scores, depending on the scoring model and how much the account is used. Additionally, closing an old account decreases your total available credit and increases your credit utilization ratio.Instead of closing an account, try decreasing the credit limit on that account and using it occasionally to keep it active. This will also prevent the account from being closed for inactivity, which can further lower your credit scores. It’s best to avoid opening and applying for new lines of credit if possible, as each application results in a hard inquiry on your credit reports which can drop your score temporarily.
5. Don’t Apply for New Credit
Many credit and personal finance professionals recommend that you apply for new credit sparingly, if at all. Every time you apply for a new card or loan, a hard inquiry is made on your credit report. While a few hard inquiries are not likely to damage your score, too many can send a signal that you’re seeking a lot of debt, which is viewed negatively by lenders. This is especially true if you’re looking to apply for a large loan like an auto or mortgage soon.However, if you’re struggling to build your credit score and have very little history of managing it, opening a new account can help. Then pay it on time and use it sparingly to improve your credit score.