What Builds My Credit Score?

credit score

Having a good or better credit score is a part of good financial health. Your credit score says a lot about your financial habits and can help or hurt you when it’s time to take out a loan. Whether you need a personal loan, car loan, home loan, or student loans, your credit score may affect your ability to qualify.

If you have a low credit score, there are a few ways you can bring it up quickly. However, how fast you can increase your credit score depends on what’s holding you back, so you’ll need to understand your credit report and tackle any issues that could be preventing your score from increasing as quickly as it should. Things like unpaid loans, high credit card debt, and a bad payment history can affect your credit score, but luckily, your credit score can increase slowly over time.

What Impacts Credit Scores?

To build your credit score, you must know the elements that make up your score and how much they impact it. Factors that affect your credit score include:

  • Payment history: Payment history refers to whether or not you have a history of paying your bills in full and on time. A single missed or late payment can affect your credit score, and lenders’ main concern is that you’re someone who can be trusted to repay the loan, so if you have a history of not paying your bills, you’ll likely have a low credit score. Additionally, any money you send gets tracked as part of your monthly financial summary.
  • Credit usage: Your credit usage ratio is the amount of credit you have versus what you’ve already used. For example, the more you use your credit card, the higher your ratio. Of course, that ratio may change over the month, depending on when your bill is due. That being said, using more than 30% of your credit can negatively impact your credit score in the short term. Instead, creditors want to see a credit usage of around 10%.
  • Credit history length: Credit history length doesn’t account for as much of your credit score as other factors, but it’s still important to lenders. Your oldest and newest credit accounts can give you an average length of credit history, and the longer your credit history, the better your credit score. Therefore, the older you get, the higher your score can be as long as you maintain healthy financial habits.
  • Credit mix: Your credit mix is the mix of types of debts you have, and the more diverse your portfolio, the higher your score.

How to Build Your Credit Score

Now that you understand the factors that can affect your credit score, you might be wondering about strategies you can use to boost your credit score. Before you apply for a loan, it’s best practice to check your credit score to ensure you qualify for the loan and can get the best interest rates. Here are a few ways to build your credit score:

Pay Credit Card Balances

Your credit utilization ratio can impact your score throughout the month. Always try to use less than 30% of your limit, and the lower, the better. Luckily, you can track your credit utilization easily with tools like CreditKarma or by monitoring your credit card balances regularly. Reducing your credit utilization can boost your score quickly, and as soon as your credit card company reports your balance to the major credit bureaus, your score will change.

You can track your credit card balances with accounting software or plan to pay off your cards early every month to reduce your credit usage and increase your credit score in the short term.

Get Higher Credit Limits

While you can’t get a higher loan amount on many types of loans, you can request an increase in your credit card limits. As your limit goes up and usage stays the same, you’ll reduce your credit utilization. Unfortunately, you may not be able to get higher limits on your credit cards depending on your income. However, if your income has recently increased, your bank or credit card provider will likely give you a boost in your limit.

Pay on Time

Always pay all your bills on time to improve your payment history. If you have a poor payment history, paying your bills on time as soon as possible is crucial to increasing your score. Late payments stay on your credit report for years, so there’s no use risking it if you don’t have to. If you miss a payment, you should discuss it with your creditor as soon as possible. Some creditors may be willing to give you more time before reporting missed payments to the credit bureaus.

Dispute Errors

Monitoring your credit score is crucial because there could be errors that affect your score. For example, if someone steals your personal information, they can open up a credit card in your name and start spending on it, which will show up on your credit report as late or missed payments. A single mistake on your report could affect your score for many years, so you’ll need to be prepared to make disputes. You can dispute errors with any of the three major reporting agencies, but it’s typically best to communicate with all of them if you notice a problem in your credit report.

Pay Off Collections Accounts

If you have any accounts in collections, you should pay those off as soon as possible to prevent the possibility of being sued for the money. Collections agencies report the debt, but once you pay it off, the mark should be removed from your account. Of course, it can take many years after paying off the debt for your credit score to go back up, but as long as you practice good financial habits, you can make your score move up a bit faster.

Report Rent & Utilities

Most landlords and utility companies don’t report to credit bureaus, but you can register with some agencies to get your rent and utilities reported so every payment can improve your credit score. These companies require you to pay a small fee to process payment data and send it to the credit bureaus monthly to improve your payment history.

Keep Cards Open

Having fewer credit cards to begin with can prevent you from overspending. However, if you already have a few credit cards, don’t close any of them. Closing your accounts can negatively affect your credit score because it reduces your credit limit and can increase your credit utilization ratio if you don’t change your spending habits. Therefore, it’s always best to keep your credit cards open even if you don’t use them anymore. However, since many credit card companies may automatically close your account after a few years without use, you should consider using your cards for specific purposes to keep them in circulation.

Final Thoughts

The easiest way to boost your credit score is by paying off your debts and paying your bills on time every month. If you want to increase your credit score faster, consider taking out a new line of credit or credit card to increase your utilization. Of course, you should continue to monitor your credit score throughout the rest of your life to ensure there are no errors that can affect your financial health.

%d bloggers like this: