Your credit score is more than just a three-digit number. Having an excellent credit score opens up all kinds of doors for you, as banks will be eager to lend money to you so you can do things like buy cars or houses or take out personal loans to consolidate debt.
Fortunately, earning a good credit score doesn't have to be hard if you know a few simple tricks. In fact, if you just take these four steps, you'll be able to build a positive credit history that makes you every lender's ideal customer.
1. Take out different kinds of loans
One common mistake many borrowers make is having just one kind of debt, such as credit card debt. Sticking with just one kind of debt can actually hurt your credit score because lenders like to know you can be responsible when repaying loans with different types of payment plans.
Ideally, you'll have a mix of both revolving debt -- such as credit cards or lines of credit, with which you can borrow up to a certain maximum credit limit and then borrow more as you repay what you owe -- and installment loans, with which you borrow a fixed amount and make set monthly payments. If you have a few credit cards and also have a student loan, mortgage loan, or car loan, for example, you'll be in good shape.
2. Pay your bills on time
This may seem obvious, but the single most important thing you can do is pay every bill on time, all the time. This is essential if you want good credit because positive payment history is the most important factor in determining your score.
Paying every bill on time doesn't just mean the obvious bills, such as your credit cards and mortgage loans. You could end up with delinquent debt reported on your credit if you forget to pay your cellphone bill one month or if you're late on your utility payment.
So make sure you fulfill any obligation you take on so a failure to pay what was promised never ends up being reported on your credit history.
3. Keep your debt balances low
Having access to a lot of available credit is a good thing that can boost your score. But actually using all the credit available to you is bad news.
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That's because credit utilization ratio is the second-most important factor determining your credit score. And credit utilization ratio compares credit used versus credit available. If you've charged $500 on a card with a $1,000 limit, your utilization ratio is 50%. Any ratio above 30% will send your score plummeting, but keeping your utilization rate as low as possible is always ideal.
You can keep your credit utilization low by avoiding charging too much on your credit cards or other revolving lines of credit -- and also by making sure your credit limits are as high as possible. Many credit card issuers allow you to request periodic credit line increases. Doing so is a good idea because the more credit available to you, the lower your ratio will be.
4. Keep your old accounts open
Keeping old credit card accounts open may seem pointless if you're not using the card anymore. But those old cards show lenders you've been responsible with repayment for a long time. Since your average age of credit is one of the factors that determines your credit score, and because lenders prefer to see a longer credit history, you should almost never close an old card.
Having old credit cards open that you don't use any more can also help your credit utilization ratio because you've got that credit available to you but have a $0 balance.
Unfortunately, this can become a problem if you have an old secured credit card and you want your collateral back or if you have a card that charges an annual fee and you don't feel like using it anymore. In these situations, try calling your credit card issuer and asking if they'd be willing to release the deposit on the secured card without closing the account or, if you're being charged an annual fee, if they could change you to a free card from the same issuer.
This may not work, and you may decide it's worth taking the hit to your credit to close the old card -- but it's always worth asking first to try to maintain the highest credit score possible.
Boosting your credit is a worthwhile endeavor
Working to improve your credit is one of the smartest ways you can improve your financial situation. By paying on time, opening a mix of different kinds of accounts, and avoiding closing old accounts, you should hopefully be able to boost your credit score so lenders will be excited about the prospect of having you as a customer.
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