Building Your Credit Score

by Ryan on March 21, 2017

Throughout life, we are scored on lots of different things. We get grades in the classroom and on standardized tests. We have all kinds of medical tests that give us a score that’s used to assess our health.

But there may be no more important single number in our lives than our credit score. These three digits determine if you’ll be able to borrow money, and if so, how much interest you’ll pay on it. There are a wide variety of factors that influence your credit score, and it takes a smart approach to your financial decisions to get the best score you can achieve. Once you do that, you’ll get more benefits than you might imagine, so keep your focus on these key areas.

Stay Current On Your Bills

When someone loans you money, they haven’t dug it out of a magic pile of cash. They are often borrowing it themselves, so they’re paying interest on it. Consequently, they want you to pay them on time so that they don’t pay extra interest to their own creditor.

As you explore installment loans online, it can be tempting to choose an aggressive payment plan that polishes off the debt as quickly as possible. But if this stretches you too far, it can backfire. You want to make sure you have some breathing room around all your payments in case the unexpected comes along. It is much better to pay on a loan for a longer term than to overextend yourself and struggle to stay current.

It isn’t just loans that matter, though. It’s also utilities, phone bills, student loans, and all the other monthly expenses you may have. Many of them will report to credit bureaus, negatively impacting your score if you don’t stay up to date.

Stay Back From Your Limits

If you’ve been paying along responsibly on your bills and maybe picked up a raise at work, your creditors may extend your limits. Don’t make this a shopping spree. It can be easy to get a little high on this feeling and experience what economists call “the income effect“, a state of mind in which behavior changes because a consumer feels that he or she has more money.

Un-utilized credit is a big component of your credit score. If you continuously max out your credit cards, you will soon find no more credit increases are coming your way. That’s because the lenders realize that you are irresponsible and represent a risk to them.

It’s okay to borrow. It’s okay to use credit cards. But you should use only what you need to use, rather than using whatever they offer you.

Keep Accounts Open

It may sound backwards, but if you have a credit card that you’ve paid off, don’t close it. Yes, you should cut up the card (actually, you should shred it into oblivion so nobody else can read the number), but keep the account open. A card with a zero balance contributes to your un-utilized credit, which we referenced earlier. The credit bureaus have no idea that you’re not charging on that account because you don’t have the card anymore. They think you’re not charging because you’re responsible.

On the other hand, by closing the account you keep only cards that have an active balance, meaning a larger percentage of your total limit is spoken for.

Building your credit is slow and complicated. It can be frustrating if you have goals to buy a home or get a new car. From the moment we reach adulthood, we should build responsible credit habits to make those goals attainable.

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