How Your Credit Score is Calculated Might Seem Mysterious – But Building it is Straightforward
Your credit score is incredibly important. It affects the interest rate on multiple consumer loans, whether or not you have access to certain financial products, and sometimes even job offers. A credit rating is, in short, the confidence that those who lend you money – in the form of credit – have that you will repay the loan. If you’re someone with less than perfect credit, figuring out how to build it back up can seem impossible. But in reality there are actually tried and true ways you can build your credit, no matter your situation. All you need is consistency, and to avoid a few important common credit mistakes, and you can have a strong credit score faster than you might expect.
The first – and most important – way to improve your credit score, or keep it from going down, is to make minimum payments on time. Missed payments will significantly damage your credit score. When trying to build your credit one of the most important things is to make sure that it at the very least doesn’t go down. If you find yourself forgetting to make payments, setting up auto-minimum payments can be a great way to stay on track, or you can use an app on your phone to send you monthly reminders. What’s important is that you find a solution that works for you, and you keep your minimum payments going.
The next step is to try to keep your utilization as low as possible – utilization being the percentage of your available credit that you’ve used. For example, if you have a credit card with a $15,000 limit and you have a balance of $5,000, you have a utilization of 33% on that card. Generally lenders want to see that utilization be relatively low, so try to keep your outstanding balances down if you can.
Even if you can’t keep your utilization low, you can avoid making a fairly common credit mistake: applying for multiple cards or loans at once. While you might just be seeing what the lender will offer you, this will result in multiple credit report inquiries – credit checks – happening at once. Lenders see this as you potentially planning to take on a significant amount of debt in a short period of time, which makes them understandably a little bit wary of giving you additional credit. Applying for one or two cards at a time is generally fine, just avoid applying for 30 car loans at once.
While there are no shortcuts to building up your credit score, there are straightforward methods to increase it over time. Just make sure you make your minimum payments on time, avoid applying for multiple loans at once, and keep your utilization as low as possible. You can do it!