How to Improve Your Credit

As you get older and reach certain milestones, your credit score becomes more and more important. A good credit score can save you a lot of money and it can be the determining factor when you’re buying a car, renting an apartment, or purchasing a home. Unfortunately for a lot of us, nobody ever told us how to build a good score or why it would become such an important number. Even more unfortunate are the common misconceptions of how to build good credit.

When you borrow money, whether through a revolving account (like credit cards) or an installment account (like an auto loan or student loan), this information is gathered by credit bureaus. This data from your credit files is used to calculate your credit score.

Your credit score is determined by five major factors:

Payment history: This is whether you make your monthly payments on time and whether you let any of your accounts go into collections.
Debt usage: If your credit card have high balances or they are maxed out, this will negatively affect your score.
Age of credit accounts: The longer you have had open lines of credit, the better.
Types of accounts: It’s good to have different types of credit history, such as auto loans and credit cards. This tells future borrowers that you have been responsible with different kinds of debt at varying limits.
The number of inquiries on your credit: each time you apply for a loan, it is considered an “inquiry”. Too many of these indicate desperation for a loan, and this will negatively affect your score.

One of the most common misconceptions about credit is that simply paying your rent and other bills on time will increase your score. This is unfortunately not the case. Only certain things report on your credit and rent, utilities, and phone bills aren’t among them. However, if you have an account with a utility company or a wireless service that is sent to collections, those will negatively affect your score.

Some of the best ways to build your score are to monitor spending on credit cards (only use 30% of your available limit, if possible), pay off credit card balances, and pay bills on time, because trying to get rid of old debt ‘is like making straight A’s in high school and trying to expunge the record 20 years later.

Whether you’re just starting to think about your future and how credit may play a role in your plans or you’re getting back on track after a few credit mishaps, we hope you consider these insights and use this knowledge to set yourself up for success.