- It can seem intimidating to build your credit, but it’s not hard to maintain once it’s established.
- Your credit is represented by a credit score, a three-digit number that gives lenders an idea of how risky you are as a borrower that fluctuates with credit-related activity, like taking out a loan or paying off credit card debt.
- Strategies like automatic payments, prioritising your debt repayment, and spending within your means can help you build and maintain your credit.
- Building and maintaining good credit boils down to spending less than you earn and using the rest to get debt-free, save, and invest – the same general personal finance strategy that enables you to build wealth.
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Your credit score is a number between 300 and 850 that tells creditors your risk of not paying back a credit card or other loan. Think of it kind of like your high school GPA, but instead of helping you get into college it helps you get the best credit cards and interest rates.
If you’re trying to build your credit, or maintain your credit, a few basic, impactful strategies can help you get up to 800 and beyond.
How to build credit
1. Make minimum payments automatic
The biggest factor in your credit score is your on-time payment history, so you should start by making sure that is perfect going forward. The easiest way to ensure you never miss a payment due date is to turn on automatic billing and payments using your bank’s bill pay or your credit card billing website.
If you are worried about overdrafting your checking, you can set your bill pay to always pay the minimum, and then pay any additional balance manually. Either way, if you’re setting up automatic payments you’ll want to be checking your credit card and checking account balances regularly to make sure you have the cash you need on hand. You can do this through your bank’s website, or through a money-tracking app like Mint or Personal Capital.
The biggest goal is to avoid a late or missed payment. Late payments show up on your credit report for seven years. That’s a long time for one little mistake to drag down your score. With automatic payments, you never have to worry about accidentally missing a due date and getting dinged for the better part of a decade.
2. Build a debt avalanche for existing balances
The second biggest factor in your credit score is your outstanding debt balances. Big balances on credit cards and other revolving credit accounts can drag your score down quickly. However, paying them off is also typically the fastest way to improve a credit score.
The debt avalanche, a twist on the debt snowball popularised by money guru Dave Ramsey, is a system where you pay the minimum balance on all of your balances each month except for the one with the highest interest rate. Pay as much as you can possibly squeeze from your budget into that one account. Once it is paid off, move on to the next highest interest rate with a bigger payment and so on until you are debt free.
While it is easier said than done, it is also mathematically the best strategy to get out of debt. As those balances go down with on-time monthly payments, you should see your credit score go up. It can take up to a month for payments to show up on your credit report and in your credit score.
3. Only apply for credit you really need
New credit inquiries show up on your credit report each time you apply for a new loan or credit card, and each one of those inquiries temporarily brings down your score by a few points. A lot of inquiries shows you have applied for a lot of credit, and lenders see that as high risk.
New credit also reduces your average age of credit, another metric in your credit score. A new account generally lowers your score temporarily and increases it in the long term. But that only works if you only apply for accounts you can manage responsibly and pay as agreed.
4. Don’t spend more than you can pay off in full each month
To get into the right mindset and set yourself up for credit score success, you should go into a credit score improvement strategy with your eyes wide open. A good budget can help you ensure you only spend what you can afford to pay off in full each month on your credit cards and can help you avoid overdrafts if you pay by debit card.
In fact, much of personal finance can be distilled down to this rule: Spend less than you earn and use the rest to get debt free, save, and invest. If you can do that, you’ll be on track for success with your credit score and your finances overall.
Related coverage from How to Do Everything: Money
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