A good personal credit score allows you to enjoy lower interest rates on mortgages, car loans, credit cards and allows you to have increased limits on credit accounts. How you use credit will always determine your credit score, so it is important you avoid making bad financial choices as they will ruin your credit history.
The following are a few basic guidelines that have been recognized by many experts as the most important steps in building a solid credit report:
1. Understand Your Credit Score
For starters, a credit score is a number that creditors rely on when deciding whether or not to lend you money. Your credit score is determined by your credit history. In the United States, credit scores are grouped in different ranges, starting from 300 to 850. This commonly used scoring algorithm is known as FICO and the breakdown is as follows:
• 300-550 – Poor• 550-620 – Subprime• 620-680 – Acceptable• 680-740 – Good• 740-850 — Excellent.
It is important to note that most creditors reject credit applications for people who have scores below 550. Being in the subprime category (550-620) does not make things any easier either as credit is not guaranteed. In the event that your creditor agrees to lend you money, the terms will most likely be disadvantageous to you. People with credit scores that are considered acceptable, good or excellent will almost always certainly get credit lines from lenders.
2. Understand The Credit Reporting Process
It is important for you to research, read, and understand how your personal credit score is determined so that you can implement the right strategy. The more you understand what goes into credit reports, the easier it will be for you to build and maintain a good one. Five key things that are used to determine your credit score include credit age, level of debt, your payment history, recent credit, and mix of credit. However, not every financial aspect affects your credit score. For instance, utility payments and checking account overdrafts won’t automatically hurt or help your credit score.
3. Manage your Debt
It is important to note that credit card balances are not the only accounts that have an effect on your credit score. Lines of credit and loan balances also equally affect your score. Avoid large debts as too many of them can make it difficult for you to afford your monthly payments. It is therefore important for you to keep your debts at a manageable level.
4. Settle Your Bills on Time
It is vital that you pay all your bills on time. While there are certain kinds of bills that do not get reported to the credit bureaus when you settle them, they could end up being reported if you pay them late. A library fee for instance, is probably one of the last things that you would lose sleep over, but as small as it looks, it can affect your credit score if it is left unpaid. Again, keep track of all your bills and pay them in time to maintain a good credit score.
5. Avoid Overusing your Credit Card
Constant use of credit cards which often leads to higher revolving credit card debt will often reduce your credit score drastically. In order to maintain a good credit score, you need to keep your credit balance within the 30% range of your credit limit. For example, if you have a $1,000 credit limit on your card then you should limit your monthly usage to only $300. Charging more than 30% on your card is risky even if you intend to pay off the balance when you get your billing statement. Card issuers typically report your balance when your statement closes and if the balance is high then your credit history will be affected even if you pay the balance in full.
6. Don’t Close Old Credit Cards
It is highly recommended that you keep your old credit cards active since card issuers stop sending updates to the credit bureaus when you close your account. It is also important to note that less weight is placed on inactive accounts and most credit bureaus will remove closed accounts. In turn, this will shorten your average credit age causing a fall on your credit score.
7. Keep Track of Your Credit Report
Just because you follow the above measures does not imply that everyone else will. Human and technical errors can occur and this could lead to a drop in your credit score. If you don’t have the time to regularly go through your credit report then you should sign up with a credit monitoring service. These companies will help you repair your credit and even send you identity theft alerts. Credit monitoring companies will also send you constant reports on your credit and they may also offer services to remove negative items from your credit. You should however only use a company with a proven track record as this industry has been fraught with frauds and scam artists.