Your credit score is an important asset to help you qualify for the best loans, credit cards, and interest rates. Behind your credit score is your credit report, which is a full credit history of the last seven to ten years of your borrowing and payment activity.
If your credit is brand new or less than perfect, follow along with these five ways to build credit history. While it takes time to build or turn around a credit score, it is well worth the effort.
Get started on building your credit history today
Make on-time payments
The biggest factor in your credit score is your on-time payment history, which makes up 35% of your total score. Late and missed payments can seriously damage your credit score, so do everything in your power to never make a late payment. A late payment stays on your credit report for seven years, which is a very long time to wait around for your score to rise. It is better to just make your payments on time to begin with.
Credit reports specifically call out payments that are 30 days, 60 days, or 90+ days late. One 30 day late payment won’t hurt you too much, but a series of late and missed payments takes the better part of a decade to repair. If you worry about missing payments, set up automatic payments at your credit card issuer’s website or through your bank’s bill pay.
Pay off credit card debt
Outstanding debt is the second biggest factor in your credit score, making up 30% of your total score. A mix of credit types can be beneficial. For example, having a mortgage can actually increase your credit score as long as you pay it on time each month. But credit card debt drags your score down as your balances rise.
Contrary to a popular myth, you don’t need to use your card each month or carry a balance to improve your credit score. The best credit card balance for your credit score is $0. If you can afford it, paying off all of your revolving credit balances, which includes credit cards and lines-of-credit, is the fastest way to improve a bad credit score. Keeping your balances below 20% of your available credit at all times is a smart strategy to keep a good credit score and keeping debt balances from going out of control.
Keep credit cards open a long time
The length of your credit history contributes 10% of your credit score. In this area of credit management, older credit is better. To calculate this part of your score, the credit bureaus look at your oldest credit line and your average age of credit to come up with an overall picture of your credit experience and credit history.
Opening up new credit accounts lowers your average age of credit, as does closing old accounts. Unless a card has an annual fee, your best bet is to keep your card open as long as possible and use it for a few small purchases each year to keep it active. If a card that you no longer find worthwhile does have an annual fee, rather than closing the account you can downgrade to a lower-tier account with no fees. This keeps your account open and continues to age your credit history.
Clean up your credit report
With some items staying on your credit report for a full decade, there are no quick fixes to a legitimately bad credit score. However, if you have negative information on your credit report in error, you can and should get that fixed. According to the FTC, about 20% of credit reports have errors.
It is highly unlikely that you would have any sort of error in your benefit, so if there is an error on your credit history it is probably hurting your credit score. That could cost you big when applying for a mortgage, for example, as a lower credit score can lead to higher interest rates — if you can get approved at all. You can get a copy of your credit report from each of the three major reporting bureaus — Equifax, Experian, and TransUnion — annually by law. Get your government mandated credit report at AnnualCreditReport.com. You can also get a free credit score from some other useful services, or maybe even your bank.
Resist the urge to tinker
Beyond paying off debt and making 100% on-time payments, there is no magic formula to build a strong credit history. The best thing you can do is avoid the temptation to tinker with credit accounts and your credit report, as that may lower your average age of credit and ultimately pull down your credit score in the short-term.
Just pay your bills on-time, pay off your debt, and leave it alone. That is the number one path to the 800+ credit score club (the best possible credit score is 850).
Credit cards to build credit
Discover it® Secured Card – Discover it is a no annual fee secured credit card perfect for building credit. Discover isn’t quite as widely accepted as Visa/Mastercard, but that means less temptation to overspend.
Capital One® Secured Mastercard® – Capital One is one of the best known credit card issuers in the United States. This secured card has no annual fee, a big plus for secured credit cards.
USAA Secured Card® Platinum Visa® – For military families, USAA is a great financial institution for banking, insurance, and credit cards. The USAA Secured Card® offers many useful benefits for low credit applicants.
You can build a great credit history
Even if you have bad credit today, you can certainly turn things around. Young people and new immigrants also have trouble with credit, as they have a limited if any credit history. The best starting place if you have no credit is opening one credit card that meets your needs, paying it off in full each month, and building good credit habits. As you become more comfortable and experienced, you can grow to valuable rewards credit cards or other types of loans. But it all comes back to that credit score and credit report, so be sure to handle it with care.
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