A good credit score makes life easier. Loans are cheaper. Credit cards give you lower rates and more rewards. Landlords let you pay them lots of money for tiny apartments.
While building good credit takes time, it’s not rocket science. Here are the 3 keys.
1. Make Payments On Time
The credit bureaus (i.e., the companies that calculate your credit) love punctual payments. As a result, payment history is the most important component of your credit score. That means you should make every effort to pay your bills on time. Not just credit cards, but also your utilities, car loan, rent – the whole shebang.
The best way to avoid missing payments is to set up automatic payments whenever possible. Otherwise, you should at least create regular reminders on your calendar.
If you miss a payment, don’t panic. If you’re less than 30 days late, just make the payment and it won’t affect your credit, though late fees might apply (sad face). If you’re 30 days or more late, make the payment and then call or write your lender to ask for a goodwill adjustment. Make sure you explain why you were late and ask that they forgive your tardiness by removing it from your credit report. Of course, the better your payment history, the better your odds of receiving an adjustment. But you can also improve your chances by setting up automatic payments before contacting your lender to reassure them that it won’t happen again.
2. Use Less Than 30% Of Your Available Credit
The credit bureaus are also into low credit utilization. Credit utilization sounds more complicated than it is. It’s just the percentage of available credit you’re currently using. So, if your only line of credit is a credit card with $1,000 available and you owe $100 on that card, your credit utilization is 10%.
Generally speaking, you should aim to keep your credit utilization somewhere below 30%. In other words, don’t go signing up for five credit cards and maxing them out. If you don’t know your credit utilization, check out Credit Karma – it’s a free tools for seeing your credit score, as well as your credit utilization, without affecting your credit score.
3. Start building credit early and keep old cards open, if you can
The length of your credit history also affects your credit score. The older the average age of your accounts, the better.
To get that number up, you should open a line of credit as early as possible, assuming you can handle it responsibly. Likewise, once you have a credit card, you should do your best keep it open. Doing so will keep the average age of your accounts higher, and even if you aren’t using the credit, it will decrease your credit utilization.
Do you have other tips and tricks for building credit? Share them in the comments.