How to Build Up Good Credit
Good credit is important if you’re about to buy a new home, finance a car, or get approved for a higher limit on your credit card. Unfortunately, when we make bad decisions with our credit, we can suffer for years and end up in a destructive cycle that continues to harm us further. But, as easy as it is to fall into a bad situation, it can be just as easy to get out of bad credit with the right tools and a little effort. If you’re looking to build up your credit, here are a few tips and tricks.
Make payments on time.
If you can only afford the bare minimum on your payments, such as credit card and loan monthly payments, the most important thing is to make them on time. Set up a recurring withdrawal from your bank account to cover the minimum payment each month, and if you’re able to, throw a little extra money at it each month. If you’re not, at least you know your payments are coming out on time, which in itself improves your credit over time.
If you’re in a situation where you cannot afford to make payments, it may be time to look at downsizing in other areas of life so you can afford to keep up with your debt. Consider trading your car in for an older model, or selling your home for something smaller until your credit is at a point where you can afford the home of your dreams with a great mortgage rate. Use a seller closing cost calculator to see if you can afford to sell your home and downsize temporarily until your situation is sorted.
Don’t close old accounts.
It may seem logical to pay off a large credit card bill and close the account, but this will probably hurt your credit score. Those with good credit keep their utilization under 30%, and that’s a big factor when bureaus put together your credit report. If you cancel the card entirely, the credit you have available is lowered and the percentage, depending on what you own on other accounts, may go up.
Let’s say you have a limit of $1,000 on three credit cards, and you have $500 utilized on each – you are using 50% of your credit. If you put $500 toward paying off one card, you are now only using $1,000 out of the $3,000 in credit you have available, bringing you much closer to that 30%. If you put that same amount toward the same card and close it, you are now utilizing 50% of $2,000 of available credit – so, in essence, you’ve done nothing to improve that utilization rate, and your credit will likely stay the same.
Credit bureaus also look at the age of your lines of credit. If you close the credit card you’ve had for 15 years and keep the one you’ve had for 10, your age will be shorter and will negatively affect your credit.
Take a good, hard look at each item that factors into your credit score. One in four people end up finding one item that looks off. This can happen for a variety of reasons. Someone with your exact name may have an item of their show up on your credit report due to a clerical error, or an old account may display the incorrect balance after you’ve paid it off. Scan your report with a fine-tooth comb and, if you see something amiss, take the steps to dispute this error.
Pay your utility bills.
Using a service like Experian Boost can help raise your credit score almost instantly. This service works by monitoring your bank account and watching items, such as electricity and phone bills, leave your account each month on time. This shows bureaus like Experian that you are capable of making payments on time each month. You can even use this service to get a credit boost for paying your Netflix subscription fee each month! If you’re paying for it anyway, why not let it improve your credit score?