It’s not a secret that your credit score is important to your financial well-being. After all, financial institutions and other businesses check your credit to make sure they’re not taking a big risk by doing business with you. And a better score can lead to better opportunities, from affordable car loans to great credit cards and lower mortgage rates.
But how do you build your credit score in the first place? Or, if it’s gone down, how do you rebuild it? To find out, let’s start with one key question:
How Do Credit Scores Work?
Your credit score is a number that’s used to gauge your ability to repay a loan. It’s based on data reported by financial institutions and businesses and compiled by credit-rating agencies. In most cases, when you apply for a credit card, loan, or certain other services, the business will check your FICO® score. Scores typically range from 300 to 850—the higher the better. Credit scores are calculated using factors like:
- How long you’ve had credit
- Your history of paying bills on time (or not)
- How often you’ve recently applied for credit
- How much debt you have, and what kind (i.e., installment loans vs. revolving credit)
Whether you’ve had credit issues in the past or are starting from scratch, here are some practical tips you can follow to build a stronger credit score and access better financial opportunities in the future.
Tip 1: Get a Secured Credit Card
For a secured card, you provide a cash deposit to your financial institution, which will hold the funds as collateral, which is security for repayment of the loan. Your credit limit is equal to the amount you deposit. Like any other credit card, your secured card lets you make fast, secure purchases in person and online. Most importantly, your financial institution will report your cardholder activity to credit-rating agencies. By paying your bill on time, every time, you can establish or reestablish good credit history to help you qualify for an unsecured card or other forms of credit in the future.
Tip 2: Keep an Eye on Your Credit
Credit reporting agencies sometimes make mistakes, and fraud and identity theft are also a reality. It’s wise to check your credit report regularly to make sure your information is accurate and up-to-date, and that there are no unfamiliar transactions. Visit AnnualCreditReport.com to request a free credit report from each of the main credit-rating companies.
Tip 3: Swipe Responsibly
The amount of available credit that you use, known as your credit utilization rate, has a big influence on your credit score. Experts recommend keeping your credit utilization rate well below 30%. So, if you have $1,000 in credit available, don’t charge more than $300 before paying off the balance. Make sure you know your credit limit and regularly keep tabs on your outstanding balance. Credit cards are revolving credit lines that let you pay off your balance as frequently as you want, so making frequent payments to your credit card is an easy way to keep your credit utilization low and save you money on interest.
While you don’t want to be over dependent on your credit card, foregoing credit card use altogether also isn’t good. Long-term inactivity can cause the card’s issuer to close your account, hurting your credit score. Use your card occasionally, even if it’s just for a single monthly bill.
Tip 4: Pay Bills on Time
Paying off your credit card balance (or making other loan payments) is key to building and maintaining your credit. For credit cards, you’ll want to pay off your full balance each month to avoid accruing interest charges. Consider setting up automatic payments or creating a reminder on your phone to make sure you don’t miss a payment.
Tip 5: Keep Older Credit Cards Open If You Can
On credit reports, each record of credit activity is known as a tradeline. Your credit history goes back as far as its oldest active tradeline, making age one of the most important factors to a great credit score. If you close your oldest credit card, the removal of this longstanding record may harm your credit score. It’s smart to keep old credit cards open unless you have a good reason to close it, such as to avoid a high annual fee or high interest rates.
Give Yourself Some Credit
Building a great credit score doesn’t happen overnight. It takes diligence and a bit of patience, but by maintaining good habits and following these practical tips, you’ll start enjoying a stronger credit score and better opportunities down the road.
At USECU, we’re committed to helping members access new financial opportunities – and get a fresh start when they need it. Take a look at our competitive Credit Builder and Savings Secured credit cards, which offer great rewards and other valuable benefits, and talk to our team if you have any questions.
AnnualCreditReport.com is maintained by Central Source, LLC and is sponsored by the three major credit bureaus: Equifax, Experian and TransUnion. AnnualCreditReport.com is not affiliated with USE Credit Union. FICO is a registered trademark of the Fair Isaac Corporation.