Picture it: The many commercials you’ve seen about building your credit score and/or getting a free credit score report from sources like CreditKarma has finally become a reality. You need to see what your credit score is so that you can buy a house or a car, and you’re not quite sure what the complete picture will be. The truth is, you might need help building it. Whether you just started building your credit or your credit took a hit in the past, don’t despair if you need to take out a loan sooner rather than later. There is hope, but best of all, there are simple action steps you can take to raise your number and lower your stress.
1. Know Your Credit History
Before you can build your credit, you need to know your credit score history. For starters, there’s your payment history. This shows whether or not you pay your bills on time, and how much of your bill you’re paying. This makes up around 35% of your credit score. And hey, we get it. Mistakes happen. If you need to set 15 reminders and alarms to make sure you pay your bills on time, there is no shame in that at all — your credit score will thank you. Then, there’s the length of your credit history to consider, which makes up around 15% of your credit score. If you’ve just started your credit building, your score may be low to reflect this lack of experience, but in general creditors can tell you’re just starting out, and they may decide to take a chance on you if your payment history is solid. Or, if you have several years of credit history, creditors will keep an eagle out for any negative actions or trends in your credit timeline. All in all, do your homework to analyze your credit history and see what you can do to raise that credit number.The rest of your score takes a look at the total amount you owe (30%) any new lines of credit you have opened recently that might pose a risk (10%) and your credit mix (10%) which shows if you have credit card loans, student loans, car loans, etc.
2. Knowing Your Limits
If you’re like most people, spending comes easy. But when your credit score is in question, spending below your means is necessary. The credit limit of your credit card should not be viewed as a challenge for how much you can spend, rather it’s the most you can possibly charge, and you should never (ever!) charge the full amount. It’s recommended that you only spend 30% of your credit limit, preferably 10% or less. The percentage of your available credit that you’re using at any given time is known as your credit utilization ratio. Trying to keep this ratio in the as-close-to-10%-or-under range can be hard, especially when retail therapy calls your name, but that sweater can wait until it’s on sale… or until next year, even. Trust us.
3. Don’t Close Old Accounts Or Open New Ones
If you’re in need of opening one new account or taking out a small student loan, for example, that’s one thing, but opening too many new accounts too quickly can be a red flag to lenders. New credit makes up 10% of your credit score. With older accounts that you might not use that often, many people believe those accounts should be closed, but that’s not always the case. When you close older accounts, it lowers the amount of credit you have available to use, thus increasing your credit utilization ratio. Having an additional card that you don’t often use can’t hurt as long as you’re paid up and in good standing. (And no, you can’t avoid closing these accounts forever — just make sure you don’t do it in the year or two before you need your credit score to be in tip-top shape.)
4. Make Sure You Have A Mix of Credit
Remember the “credit mix” that makes up 10% of your credit score? Well, it’s exactly what it sounds like — a mix of credit types, such as credit cards, student loans and car loans, all of which can show lenders that you can pay a variety of loans, in varying amounts, on time, every month. So don’t worry if it seems like your loan life is kind of all over the place — you want to show responsibility and punctuality with all kinds of loans in order to build your credit up.
5. Communicate With Creditors
Is anyone listening? It’s a good question, and we know that phone calls to people you owe money to are never fun… But it never hurts to try. If, for example, you were in good standing with your credit card company, but you hit a bump in the road and missed a payment or two, you can call your credit card company or write them a letter and explain the situation. They might be willing to work with you and report your improvement to the credit bureaus. You can also ask your creditors for advice on how to raise your credit score and what programs you can get involved in to do so. Everyone makes mistakes — but it’s how you recover from them that counts. You got this.
MORE ON HERMONEY:
- Does Asking For a Credit Card Rate Cut Affect Your Credit Score
- 10 US Cities With The Highest Credit Scores
- How to Improve Your Credit Score to Buy a Home
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