7 tips to manage and build your credit

In our last blog post we discussed what your credit score is and why it’s important. Now that you know your credit score actually matters, what can you do to manage and maintain your credit score?

I want to be very straightforward. There is no silver bullet when it comes to maintaining or improving your credit score. Your credit score is essentially just a grade based on your credit history. You can’t rebuild a  credit score.  Think of your credit score as grade for your previous credit history.   While you cannot quickly change your score you can improve your credit history over time. Here are a few actionable tips to help you get moving in the right direction.

Pay your bills on time

It sounds so simple, but seriously, making timely payments on your bills will have the greatest impact on your score. Think about it, doing something that you are supposed to do anyway affects about 35% of your overall score. This reminds me about how supposedly filling out your info properly on the SAT was worth 600 points. While not actually true for the SAT, simply paying your bills on-time will improve your credit score. That is amazing!

If you have missed a few payments, rather than sticking your head in the sand, make at least the minimum payments today to get yourself current. This very important. Go do it now!

If you have ever fallen behind on credit card payments or other recurring bills, take this opportunity to establish an emergency fund so you don’t fall prey to the vicious cycle of debt again.

Use it, don’t abuse it

In our last post, we discussed why you should have credit. But you should not abuse credit. Credit is like booze, in moderation it can enhance your life, in excess it can be devastating.

So how much is too much? Try to keep your credit balances to 30% or less of the limit. So if you have $10,000 of available credit, try to keep the balances to $3,000 or less.

30% of your credit score is based on your your ability to keep your credit use under control. High outstanding debt can negatively affect your credit score. The higher your percentage of use, the more at risk you will be perceived.

Pay off your debt

One of the best ways to improve your credit score is to pay down your debts. Doesn’t this seem obvious? Having a very low amount of credit outstanding will make you look great to other lenders and could help improve your score.

Don’t close inactive credit cards to quickly improve your score

Many of us think that if we close credit accounts that we no longer use, doing so will improve our score. But the opposite can actually be true. Since you are closing a credit account your total available credit will go down.  If your credit balance stays the same while your total available credit limit goes down this will cause your % of credit used to go up.  And this can cause your score to go down.

One way to help this if you really want to close a credit account to reduce costs etc., perhaps the account charges annual fee, is to ask a credit company that you plan to keep to increase your credit limit before you cancel the other card.

Don’t try to create history

What do I mean? If you are new to credit, get one card. Use it and pay it off in full once the statement comes. Don’t run out and get three cards in a short timeframe. New accounts typically lower your credit score and perhaps even more so when you are new to credit. So take your time, building your credit history is a marathon not a sprint.

Shop around in a timely manner

If you are shopping around for a car loan, don’t fret about checking rates at your credit union and the dealership. Just do so in a compact amount of time. One way the credit bureaus determine if you are applying for a single loan or multiple loans is by looking at the length of time between credit checks.

Make sure your credit report is accurate

You can get a free, that’s right FREE, credit report annually from the three credit bureaus here. Take a look at your reports to see if they are accurate. Make sure the limits for your credit cards are correct and that your payments are properly accounted for. If you notice a discrepancy, work with the credit bureaus to correct the issue.

At the end of the day, being responsible with your credit should put you in a better position to borrow when the time comes. Typically the better your credit score, the better the rates offered when you are looking to borrow.  A little effort now can go a long way to helping you save potentially thousands of dollars when you need to get a mortgage or refinance student loan debt.

If you are in dire straights with your credit, you may want to reach out to a credit counselor. The National Foundation of Credit Counseling can be a great resource to find a qualified credit counselor and see if a Debt Management Program might be a good option for you.