It’s never too late to begin fine-tuning your credit habits if buying or refinancing is in your future.
Let’s just cut to the chase — your credit score is super important.
This three-digit number will be examined by banks, mortgage companies, and other lenders to see if they consider you to be a credit risk. Your credit score may also determine what interest rate you may be eligible for on a mortgage. Or whether you get a mortgage at all. Credit scores are to your adult life what ACT scores were to your teen years. A high one can present you with more options, while a low one can limit your horizons.
Credit scores range from 300 to 850. The higher your score, the logic goes, the more likely you are to pay your debts as promised. Credit scores are calculated with a scoring model that looks at, among other things, your record of making payments on time, the amount of debt you have, and how long you’ve been making payments on debts. Three main national credit bureaus — Equifax, Experian, and TransUnion — track the items that eventually make up your credit score.
There’s no shortcut to building a good credit score. Like any worthy goal, a good credit score takes time and good habits to achieve.
But there are steps you can take to strengthen your credit score now; here’s how to build your credit score.
Make payments on time
Much of your credit score (approximately 35 percent) is based on your payment history, so it’s super important to pay all your bills on time. Late payments ding your credit report and pull down your score. Setting up automatic payments from your bank account is a great way to make sure you’re never late on the credit card bill or your student loan. A single late payment can stay on your credit report for up to seven years, dragging down your credit score like a dead weight.
Pay down your credit cards
Thirty percent of your credit score is based on how much you owe on revolving debt, such as credit cards. If your credit cards are maxed out, that debt you carry from month to month is dragging your credit score down. Paying them down is good. Paying them off is better.
Use no more than 30 percent of your credit limit on credit cards
Credit bureaus measure the amount of money you owe on credit cards versus the total amount of money you’re allowed to borrow on your credit cards to calculate your credit utilization. If you’re using too much of your available credit, lenders assume you’re on shaky financial ground. So if you have a credit limit of $3,000 on your credit card, try to avoid having an outstanding balance of more than $1,000 at any one time. Same goes for all your cards. Avoid having more than 30 percent of the total available credit you have.
Don’t apply for new credit
Every time you apply for a loan or credit card, the lender does what’s called a hard inquiry to check your credit score. Too many hard inquiries may lead a bank to think you are having money problems and are a bigger risk. A single hard inquiry may adversely affect your credit rating for anywhere from a few months to two years. So resist the urge to apply for those store credit cards that are always being dangled in front of you.
Keep old accounts open
Got a credit card you haven’t used in a decade? Resist the urge to close it. Those old accounts show you have a long credit history, which is a great way to build your credit score. Old, unused accounts keep your available credit higher and your credit utilization lower, both of which help build your credit score.
Fatten up a thin credit history
If you don’t have a long credit history, you’ll likely have a lower credit score. This isn’t because you’ve done anything wrong, but because you haven’t done anything one way or the other. A lot of first-time borrowers face this problem. You have to borrow money and pay it back to build a credit history, and that takes years. If you’re considering buying a home in the near term, one faster option is to pay for a credit boosting program that uses financial data that doesn’t normally show up in a credit report — like your banking history and utility payments — to demonstrate to lenders that you pay your bills on time. One watch out: Some credit boosting programs may charge a fee, so read the terms and fine print carefully.
Deal with delinquencies
If you have past due accounts, pay them. You won’t erase the bad marks on your credit report, but you will build your credit score going forward. And having all of your accounts current will put you on a path to improving your credit score.
Consider debt consolidation
Do you have a lot of outstanding debts at high interest rates? (Hello, credit cards.) You may be able to pay them off faster if you take out a loan at a lower interest rate, pay off the high-interest debts, and then make a single payment on the loan. Best of all, it’s a quick way to improve your credit utilization ratio and improve your credit score. Be sure to pay close attention to the interest rate offered on such a loan (and whether there is only a lower promotional rate), and any fees required to take the loan out.
The good news is credit scores are not set in stone. As you pay your bills on time and pay off your debt, you’re building your credit score. Follow these steps, and you should start to see an improvement in your credit score.