An optimal credit score is essential to long-term financial health, and the best ways to build one include paying bills on time, limiting credit utilization and restricting new account applications.
These strategies can help you improve your scores and prepare the way for future success. However, for results to show themselves it takes an ongoing commitment to these practices to achieve and sustain good scores.
1. Pay Your Bills on Time
Paying bills on time is a key component of improving your credit score, with payments making up the largest component of FICO credit scores and even one missed payment having an effectful impact.
Implement automatic payments through your credit card and loan providers, or schedule the due dates in a calendar or reminder app so you stay on top of your obligations.
Attitude towards credit usage also plays a part in your score; to increase it it’s ideal to use both revolving credit (such as credit cards) and installment loans such as mortgage, auto or student loans. Credit utilization – which measures how much debt exists on each of your revolving accounts relative to its maximum limits – accounts for 30% of your score and must remain low in order to remain favorable.
2. Keep Your Credit Utilization Low
Credit utilization accounts for 30% of both VantageScore (VantageScore(r) score) and FICO(r) scores; keeping this ratio as low as possible helps boost credit scores.
To keep your usage to a minimum, the easiest way is to pay off balances before the end of each billing cycle. However, if this is not feasible for you, try making payments multiple times during the month in order to maintain low consumption levels.
As another option, asking your card issuer for an increase in credit limit could reduce your utilization ratio and help improve your scores. Just be careful not to increase spending habits to account for more room in your wallet! You could also take out a personal loan to pay off cards – this would shift their debt onto installment loans which have an entirely different effect on credit scores while simultaneously leaving less credit active while creating a longer history that benefits future scoring efforts.
3. Don’t Apply for New Credit
If you’re trying to improve your credit score, applying for credit sparingly is usually wise. New credit inquiries have a small negative impact on your score and may serve as a red flag to lenders; especially if seeking mortgages or large loans; underwriters might wonder whether you will be able to manage the increased debt associated with larger loans at competitive rates and may therefore not approve them as quickly.
However, if payments are becoming an issue and you want to reduce your credit utilization ratio without asking for an increase in credit limits, opening a revolving account might help. Simply be sure that any balance is paid off before its billing cycle concludes; paying on time will have a direct effect on your score and will allow you to build solid financial foundations over time.
4. Keep Your Debts Under Control
Your specific steps for increasing your credit score depend on your own circumstances; however, some general strategies could work for most people. Paying bills on time, limiting credit utilization and not applying for new loans are all integral parts of developing healthy credit.
If you’re concerned about falling behind on your payments, setting up automatic payments with either your bank or credit card company might help ensure you won’t miss a payment and endanger your credit scores. This way, payments won’t go undetected and potentially damage them further.
Credit cards and installment loans can be beneficial to your credit, provided they’re managed responsibly. This may include paying down balances quickly while making minimum payments across all accounts. Furthermore, aim to keep the average age of all of your credit accounts high (the older they are, the better).