There are some strategies to building up good credit that you should follow to maximize your efforts. We look at the top ten of these next.
1. Borrow Only What You Can Afford to Pay For
Remember that credit cards are not intended to help you finance things you can not afford. The most optimal way to build up solid credit is to only charge what you can comfortably afford. This will show potential creditors and lenders that you are a responsible user of credit and debt. It will also make it easier to obtain additionally needed credit in the future.
Avoiding excessive debt is critical. Your credit score is really a reflection of your success with only borrowing what you can readily repay.
2. Remember to Use a Small Part of Your Total Available Credit
Credit algorithms consider maxing out your credit cards to be the height of irresponsibility. Lenders are well aware that those who borrow to their maximum limits struggle to repay what they have originally borrowed.
Exceeding 30 percent of your available credit, even if you pay it off on the due date every month, will cost you points in the critical credit utilization category comprising 30 percent of your score.
3. Start with a Single Credit Card
It can be a mistake to gather an assortment of credit cards in your first few years of having credit. The more you possess, the greater the temptation is to run them up and fall behind on payments and balances. By starting with only a single credit card, you will gain more points in the new credit category (that makes up 10 percent of your score) as you will not suffer too many hard inquiries on your credit report.
Too many new cards also reduce your average credit age, which makes up another 15 percent of your score.
4. Pay Off Your Full Credit Card Balance Every Month
In the theme of only charging what you can actually afford, pay off your entire credit card balance each month. This gives you major points in the 35 percent most important category of payment history and the 30 percent category for credit card utilization. Lenders and creditors love to see this, and your credit score reflects that bias.
Two-thirds of your credit score is based on this kind of responsible use of your credit!
5. Make Sure All of Your Payments Are on Time
Any bill that you do not pay on time has a habit of finding its way on to your credit report. Pay all of them on time and you will not become delinquent or even worse sent out to collections by a third party. Building a good credit score is a function of avoiding these negative accounts.
It can cost you 100 points from your credit score for every debt collection account that you have!
6. Balances Should Only be Carried the Smart Way
It is not always bad to carry a credit card balance if you do it smartly. Pay a larger amount than the minimum monthly payment to get these down as fast as possible.
Be sure to never be late with your credit card balances.
If you do carry debt, make sure it is less than the 30 percent magic number that the credit bureaus want to see (so you get full credit in the 30 percent credit utilization category).
7. Let Your Accounts Age
Longer time with credit is considered better for your personal score. Always keep oldest accounts open, as they boost your average credit age and build your credit profile up quickest. Closed accounts do not drop immediately off of your profile, but will fall off after two years generally. Credit age accounts for 15 percent of your score.
8. Try for a Mix of Credit Types to Improve Your Score
Rather than having two credit cards, try to get a second card as a charge card from a store or AMEX. Having variety in your credit like loans and charge cards adds to your credit mix category of 10 percent.
9. Do Not Apply for Too Many Credit Cards or Loans at Once
Your score has a 10 percent component for new credit inquiries. You can get full points in this category by not applying for too many credit cards or loans within a six month period. Spread out your credit requests and avoid those hard inquiries on your credit report as much as possible. These should be easy points to get.
10. Do Not be Afraid to Ask a Co-Signer to Help You Build Credit
If you are having trouble getting approved for good credit card offers or loans, get a co-signer. You then get the benefit of building your credit with timely payments off of their established credit history. This is a fast way to improve your credit score if you do not overextend this credit and you make the payments on time faithfully.