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Credit Building Strategies

15 Tips for Building Credit & Improving Your Credit Score

  1. Add Positive Accounts to Your File. If you have accounts in good standing that do not appear on your credit file, your goal is to have them included. Not all creditors report to all agencies since it costs money to do so. If you see a positive account that does not appear on one of your reports, contact the creditor and ask them to report to that bureau. You can't contact the credit bureau and ask them to verify positive information; they only handle disputes over negative records. Therefore, supplying a bureau with evidence that a positive entry is on another report will not cause that bureau to add the entry. Bureaus must be notified by the creditors themselves regarding positive accounts. While lenders are not required to report your credit to all three credit bureaus, they might do so for a fee that covers their reporting costs. If adding the account to a report will improve your credit rating, it could be well worth the cost. Just contact the creditor not reporting a positive account and ask.
  2. Keep Your Oldest Accounts Open and Current. If you are finding that you can no longer service your debt on all of your accounts and you are trying to decide which accounts to default on, one strategy is to default on the account(s) you have opened most recently. The reason is that the older your active accounts are, the more positive impact they have on your credit score.
  3. Get Up To Date, and Stay Current on Any Missed or Late Payments. Recent activity has a greater effect on your credit rating than older activity (for example, making a late payment on your car loan can drop your credit score by more than 100 points for as long as three months). Therefore, one way to improve your credit score is to get current and stay current on those accounts you can afford to pay on. The longer you pay your bills on time, the better your credit score. Whenever possible, set up automatic payments to ensure timely and consistent payments.
  4. Do Not Use More Than 30%-50% of Your Credit Limit. To ensure maximization of your credit score you should use no more than 30 — 50% of the credit limit on your credit cards. If your credit limit is $1,000, don't use more than $500 for purchases, and try to keep your balance below $300.
  5. Don't Pay Your Balances Off Every Month. Part of your score is your credit worthiness, but part of it also indicates how desirable (read "profitable") you are to a creditor. If you pay off the balances on your credit cards every month, then the credit card company doesn't get to charge you any interest. Though the actual percentage isn't known, you want to keep your balances somewhere between 0% and 30% of your credit limit to receive the maximum bump in your credit score.
  6. Don't Move Debt Around. Transferring balances from one credit card to another to save a few points on your interest rate will cost you more than you realize—and the cost will be reflected in a lowered credit score.
  7. Apply For and Open New Credit Accounts Only As Needed. New accounts lower your average account age; a lower average account age can have a dramatic effect on your credit score. Plus, rapid account "buildup" makes you seem like a greater credit risk, lowering your credit rating. Apply for and open new accounts (as well as request credit increases on already established accounts) only when you need to.
  8. Build Credit with Everyday Purchases. If you pay your cable bill or grocery bill by check or debit card, consider making these payments with a credit card and then paying off the card. Yes, it is an extra step, but paying your cable bill on time each month by check is not going to build your credit. Remember, every on-time credit card payment helps raise your credit score.
  9. Diversify Your Credit. An important goal is to develop a mix of different types of credit in order to show you are capable of balancing different repayment obligations for credit cards, retail accounts, installment loans, consumer finance accounts, etc. Of all the different types of credit, installment accounts like mortgage or auto loans will help improve your score the most. One store or gas card, one credit card, a mortgage and an auto loan is probably the best mix of credit. Try to stay away from financing companies (as opposed to banks) as these types of loans can actually hurt your score.
  10. Use a Major Purchase To Boost Your Credit Score. Making an expensive, large-ticket item purchase like a home or a car will greatly increase your credit rating because: (a) the loan is secured with collateral (the safest type of loan), and (b) the loan payment is the same each month, allowing the credit bureaus to measure how you handle making a fixed payment every month.
  11. Use Retail Cards. Retail cards, also called store cards, can be a great way to establish or build credit. Store cards are similar to credit cards, except they can only be used to make purchases at the store that issued you the card. Store cards are easier to get than standard credit cards, but they tend to carry much higher interest rates. If you get a store card, use it only for small purchases you can pay down each month; that way you don't get charged high interest, but you are still able to build a solid credit history by making payments on time. Make sure the retailer reports the information to one or more of the main credit bureaus. If they don't, ask them to do so. If they will not, find a store that does.
  12. Consolidate Student Loans. A good student loan strategy is to consolidate them after graduation. You can usually refinance all your individual loans into a single loan at a lower interest rate and on longer payment terms. After consolidation, all the individual student loans on your credit report will be reported as closed and paid in full, helping to improve your credit rating. A consolidated loan also allows you to change your payment plans based on your current income. Make sure to set up a payment plan that works best for you, since a student loan remains on your credit report until paid in full. Student loans are not written off or discharged in bankruptcy, and since most student loans are guaranteed by the government, if you fail to make your payments it is easy for Uncle Sam to hold back tax refunds or garnish wages.
  13. Consider a Cosigner. If you have trouble getting credit, consider having another person with better credit co-sign for the loan. To a lender, having a co-signer means you and the co-signer are both liable for re-paying the loan, even if you are the only one who will actually make payments. Over time, if you maintain a positive payment history on the account, your credit score will improve. But, if you should default on the loan, your cosigner's credit will be adversely affected, so make sure you can consistently pay on time.
  14. Obtain a Secured Card. If you don't qualify for a standard credit card account, you can get a secured card to help build your credit. A secured credit card requires you to deposit your own funds (equal to the secured card's credit limit) in an account to guarantee payment for purchases you make using the card. The account is reported to the credit bureaus and you make payments on the account just like you would a regular credit card. If you fail to make a payment the lender will pull the payment from your deposited funds. If you make all your payments on time, in about a year or so you should be able to qualify for an unsecured credit card. Keep in mind some creditors may try to take advantage of your inability to acquire a standard credit card by offering you a secured card that comes with an annual fee and monthly processing fees. You should not have to pay fees to obtain a secured card. Shop around until you find a bank or credit union that does not charge a fee or fees for granting you a secured card. Or click here.
  15. Use a Savings Account or Equity in Your Home to Borrow Your Own Money. If you have a checking account at a bank, you can open a savings account and then use the savings account as collateral to take out a small loan the bank will report to the credit bureaus. As you pay back the loan you create a positive credit history. You'll be on your way to building your credit in a short period of time. If you have equity in your home you can take out a home equity loan and use your on-time payments to build up your credit. Be careful, however, because unlike secured debt, this loan is secured by your home.

 

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