Achieving a good credit score is an adulthood headache for many. You’ll eventually need it, whether it is to buy a car, rent your first apartment, have utility bills under your name, and much more. It might seem daunting, but it doesn’t have to be. Here are 5 ways to get and maintain a good credit score!
You might be thinking, “duh, always pay on time”, but it’s much more than that. Paying your loans on time, every time, shows your credit lender, whether they are a bank or a credit card company, that you are a trustworthy borrower. An easy way to pay on time is to set up automatic payments for your statement each month. This is to avoid late or missed payments, also know as delinquencies, which can stay on your credit report for around seven years, and have a major impact on your credit score. Not sure you can meet the statement balance each month? Look into setting up the automatic payment with the minimum balance each month, which for most credit cards, and depending on your statement balance, is around $29. Another viable option is to set up payment reminders throughout the month and plan your budget accordingly. Pro tip: consider making extra payments to your credit line, as this positively impacts your credit score.
Having only credit cards isn’t the same as having a varied credit portfolio. You can create variety by having credit cards, auto loans, or mortgage loans. Once your credit score is around the mid to high 600 range, which is the average to good range, it’s time to think about applying to other types of credit. If you’ve been considering purchasing a car, know that this decision may positively impact your credit score. If you’re not ready for the bigger commitment that is an auto loan or, scarier yet, a home loan, consider taking on a new credit card. Having multiple credits cards increases your credit line, which is the total amount of credit available to you throughout all of your credit cards. The larger your credit line, the better your score, in theory, will be. Warning, though, do not take on any credit or financing that you don’t need or aren’t sure you can stay on top of.
Now that you know that having multiple credit cards or loans actually increases your credit score, you might be tempted to apply for every card or loan that you’re offered. However, it isn’t as easy as that. First and foremost, you must always research a credit line, whether it is a credit card or some type of loan, before signing onto it. Both credit cards and loans have benefits and drawbacks, and you should always search for the one that matches your needs and goals best. Every time you apply for a credit card or a loan, you’ll get a hard inquiry on your credit report. A hard inquiry means that the credit lender requested to look at your credit file (credit score, credit history, and the like) to determine how trustworthy you are as a borrower. A hard inquiry will lower your credit score by a few points. The upside to this is that hard inquiries are taken off of your credit report in about 1 to 3 years, meaning they’ll no longer affect your credit score. Nonetheless, if you apply for multiple cards, loans, or a mix of both within a short span of time from each other, know that all of those hard inquiries combined will significantly lower your credit score and decrease your chances of being approved for some time to come. Don’t over-apply to credit lines, do your research, and be wise with the hard inquiries.
One of the major factors in calculating your credit score is the credit utilization rate. Sometimes referred to as the credit utilization ratio, this is basically the amount of credit you are currently using versus the amount of credit you have available to you. So for example, you have 3 credit cards, all with a $1,000 credit line, totaling in $3,000 of credit available to you. The general rule of thumb is to keep the credit utilization rate under 30%, so out of that $3,000, it’d be wise to only use $900. If you want to be extra careful, you could divide those $900 throughout the 3 credit cards, using only about $300 on each. This allows you to maintain a good credit score while also using your cards. If you go above the 30% rule, which can sometimes happen, your score will be negatively impacted. But don’t worry! If you go above the 30%, focus on making on-time payments–and extra payments if you can– to lower it back under 30% and strengthen your credit score once again.
Building a good credit score takes time. Specifically, the age of your credit score will directly influence your score. For example, let’s say you just started building your credit and it’s about 3 months old. At that point in time, you don’t have much credit history: you don’t have enough monthly payments to prove you are trustworthy, you don’t have a variety of credit, and you probably don’t have a large amount of credit available. Within 1 year, however, this can change greatly. You’d have made at least 12 monthly payments–the more, the merrier–, these on-time payments in turn raise your score to the point where you can apply for other credit lines, which diversify your credit portfolio and increase your credit line. Moreover, the fact that your credit history is 1 year old automatically increases your score by a few points, and it will keep increasing as your credit history ages. Pro tip: If you began your credit history with a credit card, never close that account and try to regularly use it, even if it’s for a pack of gum, to avoid it being closed on you by the lender. This first credit line will establish your credit history, and if it’s closed, it’ll decrease your overall credit age and negatively impact your credit score.
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