I’ve been paying attention to my credit since I graduated from my Bachelors degree. Regularly checking my credit report was the easiest way to ensure my student loans remained in good standing as I repaid them, no credit cards were opened under my name through identity theft, and credit accounts I requested to be closed were actually closed. This might seem like overkill to worry about since I was always making my debt payments on time, but as many of 18% of credit reports contain errors and I’ve been the victim of identify theft before, so my paranoia keeps me watching my numbers.
Because bad credit means you can be denied credit when you need it (like to qualify for a mortgage in order to buy a house) or will have to pay higher interest when you borrow, errors on your report aren’t just inconvenient, they can be expensive. Because of the high cost of having bad credit, people are always looking for an easy way to improve their score — sometimes being tempted by scams promising to help you build good credit for a monthly or annual fee.
Don’t pay for expensive credit monitoring services
There are a number of shady financial businesses both online and off that promise to “repair” bad credit at a cost. Most of them function by having you take out an expensive loan directly from them, which you pay back at a high interest rate in addition to their “fee” for helping you fix your credit. Some don’t even do that much — some just take your money!
You cannot buy good credit, you can only build good credit.
Avoid any business that claims they can “help” you improve your credit. The only way to build good credit is through diligence and time.
When it comes to fixing or improving your credit history, the first thing you need to do is get your credit report
Your credit report and credit score are two different things. Your credit report is a summary of current and recent loans in your name, with their respective payment histories. Your credit score is a numerical number assigned to reflect your credit worthiness based on your credit report.
You can request your credit report for free from either TransUnion or Equifax. All you have to do is fill out a form and send proof of ID, and you’ll receive your credit report in the mail within a few weeks. You can get your score from the same reporting agencies for about $25.
Whether or not you want to know your actual credit score is up to you. For the most things, your credit report is all you need to view the status of your accounts and ensure nothing is incorrect. I personally only request my credit report. I know so long as everything looks good on there, my credit score will be good as well. Additionally, because the purpose of a credit score is primarily to qualify for more debt and I don’t plan on taking any on, I don’t feel the need to know my credit score. Depending on your financial goals and plans, your circumstances may be different.
If you’re looking to improve your credit score, the 5 steps below will help you build good credit over time!
1. Pay all your bills on time and in full
Paying your bills when you’re supposed to pay them is hands-down the most important part of building a strong credit history and getting a good credit score. Whatever your monthly obligations, make the effort to pay everything 2-3 days before the due date to ensure you’re never late or miss a payment. One of the easiest ways to do this is to set up an automatic transfer from your bank account directly to the bill so you never have to worry about it.
My favorite strategy is charging all my bills to one credit card, then setting up an automatic payment from my bank account to that credit card. This keeps all my bills paid in full and on time!
I cannot emphasize how important this is! As little as 1 or 2 missed payments can be reported by your service provider to a credit reporting agency, where they will stay on your credit report for years. It’s not worth it to be haunted for years by a late payment!
2. Pay off your debts
The more debt you have, the riskier you are as a borrower. While debt itself is necessary to develop a credit score in the first place, having too much of it will make lenders wary of giving you more money. Obviously, the more you owe, the less likely you are to be able to pay it all back.
Need some kick-in-the-pants motivation? You might like this post: Pay Your F#$%ing Debt
If you’re looking to improve your credit in order to qualify for a new loan, one of the best things you can do is pay off your existing debts. Not only does this improve your credit score, it’s also great for your net worth. The less money you owe to creditors, the more secure your finances are overall, so always make debt repayment a priority. You do not want to take on new debt when you’re already struggling to get rid of the debt you have.
3. Keep your credit utilization low
One thing that’s terrible for your credit is living completely maxed out. Unfortunately, many people do this, and it’s not uncommon for people not to even worry about their debt load until they finally run out of money to borrow. Many people get into trouble with debt because they treat credit as disposable income. Whenever they get a new credit card in the mail, they go on a shopping spree. Not only does this behavior get you into trouble when those bills come due, it’s bad for your credit score because you’re always living at the edge.
You should make an effort to never carry a balance greater than 1/3 of your credit limit at any given time.
This means if your credit card has a limit of $3,000, you should never have more than $1,000 charged to the card. Obviously there are instances where this cannot be avoided (ie. booking flights for an international trip!) but if you ever charge more than 1/3 of your total credit limit to your card, make sure you make a payment right away to bring the balance down. Your credit report will list the highest balance you have carried on each form of credit within the last 12 months, so even if you have brought your balances down, creditors will be able to see if you’ve recently toed the line of maxing out!
Keeping your balances below 1/3 of your limit isn’t only good for your credit score, it keeps you away from financial catastrophe. You never want to find yourself in a position where you owe more than you can comfortably pay off in a single month. If you have a lot of high-interest debt in the form of maxed out credit cards, it might be in your best interest to ask your bank about a line of credit or debt consolidation loan. This will let you reduce the balance on your credit cards, improving your credit utilization, as well as reduce the interest rate of your debt.
4. Use different types of credit
What types of credit you have or have had in the past also impact your credit score. A cellphone bill or credit card doesn’t carry the same weight as a car loan or mortgage, simply because they don’t represent the same timeline and level of responsibility. For this reason, larger loan balances and those with longer repayment terms typically influence your credit score more than smaller balances with shorter timelines.
This is one of the reasons it’s hard for young people to build good credit: they just haven’t had that much debt over that many years yet!
If you’ve never had any type of debt before, chances are you don’t have a good credit score. This is why it sometimes make sense for someone to use a credit card or get a car loan, even if they can afford not to. It might seem crazy to needlessly pay interest on a balance when you don’t have to, but if you’re doing it to build credit history, it can make sense in some cases. If you have no credit history whatsoever, but are looking to build good credit, apply for a credit card, line of credit, or personal loan, make some charges to the balance, and then spend 3-6 months paying it off.
5. Don’t take on too much at once
If you apply for a car loan and 3 credit cards in a single month, it’s going to set off red flags for the credit reporting agency. Building a good credit history is a long term play, so be patient and pace yourself when it comes to borrowing. If you recently applied for a credit card and were declined, follow the above steps 1 through 4 and try again in 6 to 12 months.
It takes a long time to repair or build good credit, so you have to have a long term perspective — just like with any other area of your finances!
I’m sending in my request for my annual credit report check this week, and I encourage you to do the same.