How to Build and Improve Your Credit
If you’re just getting started and don’t have any credit, you’ll need to get something like a secured credit card that you can use to start building a credit history. Assuming you already have a credit score, here are the best tips that you can use to improve that score.
Focus on Making Payments
As we discussed, the most important factor that determines your credit score is your payment history. If you constantly miss payments or make late payments, you’ll have a bad credit score regardless of anything else that you do.
That’s why the most important rules for building credit is to only borrow money when you can afford to pay it back and to make sure that you never miss a payment. Even one mistake can have a massive effect on your credit score and that black mark will stick around on your credit report for seven years.
The best way to make sure your payment history stays clean is to sign up for automatic payments for all of your credit cards and loans that allow it. Even if the automatic payment only pays the minimum, that will help you avoid hurting your score and get you started on the path to strong credit.
Avoid Maxing Out Your Accounts
The second most important factor in determining your credit score is the amount of debt that you have. This includes both the absolute amount of money that you’ve borrowed and the amount that you’ve borrowed as compared to your credit limits.
It’s understandable for lenders to be worried if you’re applying for a loan while you’re maxing out your other lines of credit. Do what you can to avoid letting your credit card and other loan balances get too high. Asking for credit limit increases and making mid-statement payments on your credit cards can help improve your score if you tend to rack up large balances.
Keep Old Accounts Open
Lenders like it when they see that you’ve built long-term borrowing relationships. That’s why the credit bureaus look at the average age of your credit accounts when determining your credit score. Each new loan or credit card that you apply for will reduce the average age of your accounts. Keeping old accounts open, even if you don’t use them, can reduce this effect.
So long as the card doesn’t charge a fee, I recommend keeping old credit cards open and using them for small purchases once or twice each year. This will keep them active and help boost your score as your oldest cards age.
Don’t Apply for Too Much Credit at Once
Every time you apply for a credit card or loan, your credit score drops by a few points. This means that you only want to apply for loans when you need them.
The good news for real estate investors is that special rules help reduce the effect of rate shopping. If you apply for multiple mortgages within a 30-day period, the major credit bureaus will only note one application on your report. That means that you’re safe to shop around to find the best mortgage rate.
Short-Term Tricks to Boost Your Score
The hard truth is that building a good credit score takes a long time. You need to have at least a year or two of on-time payments under your belt before you can start qualifying for the best loans. Even then, you might be lacking in some other areas.
Still, there are some things you can do that will have a small, but immediate, impact on your score. This can help you secure lower mortgage rates if you’re on the cusp of moving into a better credit score range.
The most effective trick is to pay down your existing loan balances and to avoid using credit cards in the month or two before you apply for a loan. Card issuers report your balance to the credit bureaus each month. If you don’t use your cards, they’ll report a low balance or no balance to the bureaus, which reduces your credit utilization. That will give your credit score small boost
The other thing that you can do is check your credit report for errors. For example, if your credit report shows a missed payment that never happened, reach out. You can get these errors removed from your report, which will boost your score.
Building good credit takes time. Focus on making your payments every month, only apply for loans when you need them, and avoid maxing out your credit cards. If you do these things, you’ll soon have a great credit score that you can use to qualify for the best mortgages on the market. Be sure to check out the next article in our credit score series: https://fibyrei.com/fico-score-vs-vantagescore-what-you-need-to-know/