Having a great credit score is ESSENTIAL because it opens up so many opportunities such as being able to buy a new home or car. If you're not buying in cash, you need to have a credit history in order for lenders to trust you. Think about it, they have no other way of knowing how reliable you truly are. Let's breakdown what credit bureaus use to assign credit scores:
- Payment History (35%): This factor contributes the most to your score so make sure you are setting up reminders to make payments on time or schedule automatic payments when possible.
- Credit Utilization Ratio (30%): This ratio takes into account how much of your debt you are using out of all your credit available.
- Length of credit history (15%): This one favors people with a long credit history (10+ years) while those on the other end (teens, for example) struggle in this category. I have an AWESOME TIP regarding this, later in the post!
- New credit accounts (10%): This factor takes into account how often you open accounts. You do not want to apply for credit too often because it sends off the message that you need it to be stable.
- Credit Mix (10%): There's other types of debts you can apply for such as car loans, student loans, and home loans.
MUST READ TIPS ON BOOSTING YOUR SCORE:
1. Make sure there are no errors
The Federal Trade Commission says about 5% of consumers have errors on their credit reports bad enough to result in a higher price for a financial product or insurance. This is alarming because a part of this group will probably not correct these errors. How can you check? You are allowed one free copy, once a year, of all three of your credit reports under the Fair Credit Reporting Act (AnnualCreditReport.com)
Order your copy and revise it multiple times to make sure there are no mistakes that could affect your score.
2. The 30% Rule
It is recommended to use up to 30% of your total credit available. That is, if the total credit limits for your cards are $10,000, keep usage to a maximum of $3,000. This will demonstrate that you know how to manage your credit and do not overspend. Also, always prioritize payments for the cards with the highest utilization ratio.
3. Pay more than once
Typically, card companies report balances at the end of the month. If you are using your card often and making big payments, they will likely think you are overspending even if you pay it off completely. Make one payment two weeks prior to your due date and one before your due date.
4. Apply for new cards every 4-6 months
This was the BEST way to build credit that worked for me when I started. If you're a newbie, I recommend looking into cards that are likely to approve you (there's many many articles on which ones) and start building credit with that card. After making payments onetime and keeping your utilization low for approximately 4-6 months, you should apply to a new credit card. This will ensure your application won't be denied and you can continue to build your history.
5. Become an authorized user
If you have made some financial mistakes or you are new to credit, find someone with a great credit history that will allow you to become an authorized user. Make sure you know the financial responsibilities that comes along with this. The authorizer's credit card history will affect your score, make sure they have made payments on time and the age of the account is at least a couple of years old. This can give your score a boost since you become a link to the credit card to the bureaus. If you are new to credit, this also helps with the average age of your accounts. This factor affects 15% of your score!