For most people, their credit score is something they either flaunt with pride or hide with shame. Your credit score can be the difference between renting or buying a home, driving a beater or something off the showroom floor, paying or saving hundreds or even thousands extra in interest fees and landing your dream job. Several factors affect your credit, so understanding the positives and negatives will give you better control over your score. Those factors include length of credit history, payment history, amount of available credit, credit types and credit pulls.
No matter if your score falls in the upper or lower range of the scale (850 – 300), these tips will come in handy to help move it in the right direction.
Length of Credit History
Put simply, the longer you have had an established & positive credit history, the better your score will be. It’s a great idea to get your first credit card shortly after turning 18 years old. Since you won’t have any prior credit history, you’ll most likely receive a very low credit limit on your first card. If you are denied your first credit card application, consider going to your bank and getting a secured credit card. A secured credit card is protected by funds you place in an account and leave there to “secure” the credit line. You’re essentially borrowing money from yourself but the benefit is the bank will report this account to the credit bureaus, marking the beginning of your credit history.
Pro-Tip: Never cancel your oldest credit card! Doing so will shorten your total credit history length and can destroy your credit score.
This one is pretty self-explanatory but just to cover all of our bases - make your payments on-time every time. Even if it’s just the minimum payment, make sure your creditors are receiving payments as you agreed so they’ll report your on-time payments. Doing this every month helps your credit score and will show new creditors that you are low-risk and will increase your chances of getting approved on future credit/loan applications.
Amount of Available Credit
If you're given a $1,000 credit limit on your first credit card, max the card out and make on-time payments, your credit score will actually begin to drop. The reason for this is that your available credit is too low and looks bad to creditors and the credit bureaus. The magic number you want to remember is 30% - keep your credit utilization or percentage of available credit compared to all your available credit limits under 30%. If you keep $300 or less on that same $1,000 credit card, your credit score will increase over time.
Once you’ve established some positive credit history and you want to take your score to the next level, it’s time to consider opening up different types of credit. A car loan, personal loan or mortgage would diversify your credit report and looks great to the credit bureaus and creditors.
When you fill out a credit application, the credit card company, bank, dealership, etc. will request your credit file from one or more of the major credit bureaus. These are called credit pulls or hits and too many of these can have a negative effect on your credit score. The good news is, the credit bureaus will group together multiple credit pulls within a certain timeframe, understanding that consumer tend to shop around and might fill out multiple credit applications at different dealerships when shopping for a car.
Pro-Tip: Checking your own credit report does not hurt your credit score!
If you follow these tips, you’ll build yourself an awesome credit score and receive all the benefits that tier one credit affords.