In a world of immediate satisfaction, it can be hard for consumers to have patience when it comes to building their credit score long-term. These days it’s all about the quick fix, but it’s the long-term strategies that will have the biggest impact on your credit score.
And sure, there are some quick steps one can take that can have a pretty immediate effect on their credit score. However, getting in the habit of simple personal finance practices and following through on them regularly can make growing your credit score over time easy and stress-free.
The first step is pretty simple…
1.) Apply for a credit card and become an active credit user
Depending on where you’re at in life, you could have anywhere from one to multiple credit cards. While there isn’t necessarily a set number of credit cards one should own, it is true that multiple credit cards from various issuers is essential for building credit.
Credit bureaus like to see different lenders on your credit report for various reasons, but what it really comes down to is multiple accounts on a report proves that various lenders have trust in you as a consumer. And while too many open credit card accounts can have a negative effect on your credit score – especially if you carry multiple balances – carrying two to four active credit cards in your wallet and using them responsibly will build and maintain your credit score.
When we say “active” accounts, we don’t just mean that these accounts are open, but that they’re also actively used and maintained on a regular basis.
A dormant account won’t do much to improve your credit score, and in fact can hurt your credit score if your account is closed for inactivity. A closed account can be a credit killer, so it’s important not to let those credit cards collect too much dust between uses. The best way to do this is by designating small monthly or bi-monthly purchases for particular cards and making payments in full on each billing cycle.
So, if you have zero or one credit card, you may want to consider applying for a new credit card in an effort to build your credit score. And if you’re not using the credit cards you currently have, try to get in the habit of using them sparingly, just to show lenders and bureaus that you are an active credit user.
2.) Never skip a payment
Fair Isaac, the developer behind your FICO score, has gone so far as to say that 35% of your credit score is made up by your payment history. Making on-time payments each month and never skipping a payment is absolutely crucial when building your credit score in the long-term.
Sure, this probably isn’t “news” to you – of course payment history can affect credit score. But few consumers are aware of exactly how much a default payment can have on your score over time.
In order to maintain your score and keep your interest rates low on everything from home loans to auto loans – the big ticket items that can carry serious interest – it is imperative that you make paying back your credit card bills on time, each and every month.
3.) Keep Your Credit Utilization Low
Finally, the amount of credit you’re using versus the amount of credit you have available to you also has a great impact on your credit score, especially over time. In fact, according to the aforementioned Fair Isaac, 1/3rd of your credit score is determined by the amount you owe.
Your total balances should amount to less than 30% of the total credit available to you, and in a perfect world it would be less than 10%.
It’s a funny balance you have to find when improving your credit score, isn’t it? On the one hand, you want to use your credit sparingly, but enough to show lenders that you do know how to use your credit cards re