Factors That Impact Your Credit Score
Your credit score can affect your life in big ways. It can be the factor that determines whether a landlord enthusiastically accepts your lease application, lenders give you great interest rates on a mortgage or car loan, or credit card companies extend you a line of credit on a card with lots of rewards. Your future employer might also be checking your credit score, as well as your car insurance agent, so it’s important that your score is high.
Having a solid credit score can save you a lot of money and quite a few headaches.1 Not there yet? Here are some credit-building tips that may help you raise your credit score.
Give Yourself Some Credit
A good way to build up your credit score is, well, having a line of credit in the first place. If you’ve never had a credit card before, apply. A no-fee credit card is a good place to start. If your lack of credit history leads to a lot of rejections from credit card companies, you have two options.
First, look into secured credit cards. These come with an up-front cash deposit (say, $500), which gives you a credit limit equal to that deposit. As with all credit cards, pay the secured credit card in full and on time. This will build your credit score in a beginner-friendly way.
Second, you can also improve your score by signing on as an authorized user on someone else’s card. This is will allow you to piggyback on an existing line of credit.
Now, for the warning: If you run up lots of charges you can’t pay off, you’re doing damage to the credit of the relative or friend who generously allowed you to become an authorized user on his or her account. If you know you’re not disciplined enough to be trusted in this way, don’t do this. But, if you are able to keep up with your payments, this method can help you transition from no credit score to a decent one.
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Be Sure to Check Your Credit Report
If you have one or more lines of credit already, it’s important to check your credit report on a regular basis. You’re entitled to free credit reports once a year from each of the three credit bureaus. If there are any errors on your reports, those could be dinging your credit score through no fault of your own. Reporting those errors can result in some big gains.
Pay in Full and on Time (And Ask for a Goodwill Adjustment When Appropriate)
Your payment history accounts for 35 percent of your credit score, so bring that score up by paying your bill in full, on time, every time.2
If you’re trapped in a cycle of not being able to pay your bill, it’s time to seriously evaluate your spending and set a tight budget until you get your credit card balance under control. Another thing to note is that credit card companies don’t report a late payment to the credit bureaus until you make one that’s more than 30 days late. If you had to pay a bill a few days or weeks late and were hit with a late fee, it’s worth calling up the credit card company right away to see if they will do a “goodwill adjustment” and reverse the late fee. This usually isn’t a problem if you have a history of on-time payments.
Don’t Max Out Your Credit
While you want your credit score to be high, you want your debt-utilization ratio to be low. That ratio is the percentage of your available credit that you spend. Look at it this way: If you have a credit limit of $1,000 and you spend $500 before you pay the bill, that’s a debt utilization ratio of 50 percent.
That’s quite a bit higher than the recommended ratio of 30 percent. Here are some tips to keep that ratio low:
- Ask for more credit: If your credit limit goes up but your spending stays flat, your debt-utilization ratio will fall.
- Pay your bill more often: Rather that racking up a larger bill that you pay each month, you can pay in smaller installments multiple times per month. This keeps the balance that your credit card company reports to the credit bureaus lower.
- Charge less on your card: A simple way to keep that credit utilization low is to minimize how much you’re charging each month.
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Patience is a Virtue
When it comes to your credit score, what’s considered a quick change is all relative. Unfortunately, none of the positive changes you make will increase your score overnight, but you should begin to see a change in a month or two.