Best Ways to Build a Good Credit Score

Credit is a two-edged sword. Use it well, and it can be an effective financial tool, efficiently cutting down on paperwork and streamlining your life. Good credit expands your financial freedom and opens doors in housing, education, business and more. When used poorly, it can cut your financial dreams short. Poor credit limits your financial freedom in many ways:

• Higher interest rates on major purchases.
• More limited employment opportunities.
• Limited housing options.
• Higher insurance payments for your car or home.
• Paying deposits on utilities.
• Diminished cash flow due to debt service.

To use credit well, it’s important to understand the nature of the credit system and the role of credit bureaus. These organizations are responsible for tracking your borrowing behavior. Your personal record of credit use generates what is known as your credit score. This number tells future lenders whether you’re trustworthy with credit. Learn more about credit scores and how to get your credit report from usa.gov/credit-score.

Having a high credit score makes a difference when you want to do big things in life, such as buying a house or starting a business. This article shares strategies to help you get there.

Keys to building good credit

To maintain a good credit score, it’s crucial to follow a few pivotal principles.

1. Pay your bills on time. This is the most important factor in determining your credit score. Late payments, even by a few days, can have a negative impact. Setting up automatic payments or reminders can help you avoid missing due dates.
2. Minimize the amount you owe. Keep your credit utilization ratio low by paying down balances on your credit cards. Ideally, your balance should be less than 30% of your available credit. The less you owe relative to your credit limit, the better it will reflect on your credit score.
3. Maintain accounts for a longer duration. The longer you keep your credit accounts open and in good standing, the better it is for your score. Avoid canceling old accounts, even if you no longer use them, as this can shorten your credit history and negatively affect your score.
4. Understand the different impacts of revolving versus installment credit on your score. Revolving credit, including credit cards and lines of credit, allows you to borrow up to a limit and repay over time. Installment credit, such as mortgages or auto loans, involves borrowing a fixed amount and repaying it in set installments. Having a mix of both types of credit can benefit your score by showing that you can manage different types of credit responsibly.
5. Avoid accounts going to collections. If you miss multiple payments over an extended period of time, usually 90 days or more, your account may be sent to collections. Having your account referred to a collection agency can severely damage your credit score.

Why good credit matters for your first home

When you’re ready to buy your first home, you apply for a mortgage loan. Your credit score directly affects the interest rate you receive on your mortgage.

Good credit scores qualify for lower interest rates, while poor scores result in higher rates. The cost difference between the highest and lowest rates may not seem much until the cost over 30 years is calculated. Qualifying for the lowest interest rate on a mortgage could save you tens of thousands of dollars by the time your home was paid for.

Building and repairing your credit

If you’re just starting out or need to rebuild your credit, it’s important to take the right steps. Here are some strategies for building or repairing your credit.

• If you have no credit history or poor credit, a secured credit card is a good way to start. With this card, you deposit a certain amount of money upfront, and your credit limit is typically equal to that deposit. By paying off the balance in full each month, you can build positive credit history over time.
• If you have existing debt, prioritize paying it down. Start with high-interest debt, such as credit card balances, as these can quickly accumulate and hurt your credit score. Consider working with a credit counselor if you’re struggling to manage debt.
• Create a budget to make smarter financial decisions. By calculating the funds required for rent and mandatory expenses, you can determine your available disposable income.

Monitor your credit

Regularly monitoring your credit is another best practice to stay on top of your financial health and build good credit. By reviewing your monthly bank statements and monitoring your credit, you can identify errors and signs of identity theft, such as unfamiliar accounts or inquiries. Early detection allows you to dispute mistakes quickly, minimizing potential damage to your score. Additionally, tracking your credit progress allows you to see how your actions affect your credit score.

Most credit bureaus offer free credit reports once a year, and many also provide access to your credit score. Additionally, there are many services available that allow you to check your credit score regularly for free or for a nominal fee. Taking advantage of these services can help you stay proactive in managing your credit.

Credit is a powerful tool that requires responsibility. By understanding how credit works, maintaining a good credit score and monitoring your credit, you can make informed decisions and protect your long-term financial goals.