Financial freedom starts with building excellent credit. Credit is a key factor in determining which tools you can utilize to make important financial decisions in the future. Whether you have no established credit, or if your score has been damaged over the years, there is always a way to get back on the path towards building excellent credit. So, how to build excellent credit from scratch? The answer is in the five tricks below.
1. Open a credit card
Applying for your first credit is the best way to get started. This can be a secured credit card or a traditional one. Utilizing an open credit line and paying off the balance before each statement cycle is an easy way to establish credit if done responsibly.
2. Credit Builder Loan
Most people will need to take out a loan at some point in their lives, whether it’s a student loan, car loan, or mortgage. If you don’t feel comfortable opening a credit card yet, then taking out a loan and making on-time payments is another option for establishing credit.
3. Monitor & Fix
Regularly monitoring your credit reports helps you stay on top of your credit and know if something is pulling it down. For example, your credit report states that your credit card utilization is too high, then you should limit the use of your credit card, make a payment to lower the utilization or ask credit card providers to bring up your credit line. If your credit report indicates that payment history is dragging down your score, then you should try to make your payments on time.
4. Ask for a credit line increase
One of the most important factors in building excellent credit is your credit card utilization. It is recommended to have your card utilization at 30-35% of your max credit line. An easy trick to bringing down this number would be to ask your credit card provider for a credit line increase. For example, your maximum credit line across all your credit cards is $30,000 and you are using $15,000. That brings credit utilization to 50%, which is about 20% over recommend percentage. After reviewing your request, your bank or credit union decided to increase your credit line to $40,000, automatically that brings down credit utilization to 37%. Still a little over the recommended number, but that is taking off 13% without making a single payment. This exact trick once helped me to get almost 100 points boost in 5 months.
5. Become an authorized user
Another trick that works most of the time is to ask someone responsible and with a great credit score to add you as an authorized user to their credit card. If they make all their payments on time, that will go towards your credit history too. However, keep in mind that if they “screw up” with payments or something else, that will show up on your credit report as well. Therefore, if you have someone that you can trust, your credit can benefit from this.
How to maintain excellent credit
So now that you’ve established your credit, how do you continue building onto it and more importantly maintain it? It’s important to know what factors impact it. In summary, the main elements that affect credit scores are as follows:
- Avoid Hard Inquiries
A Hard Inquiry is when a bank makes a request to one of the major credit bureaus for your credit report. Any time you request a loan or new credit card, the bank is going to run your credit report in order to gauge your risk. Hard Inquiries are essentially in place to track how many times a person is requesting new lines of credit or loans. The more Hard Inquiries that appear on your credit report, the more it hurts your credit score.
Tip: Be wary of any institution that attempts to run your credit report. When going to buy a car or open a new credit account, ask the agent if they’ll be making a Hard Inquiry. In some cases, an institution may just need to run what’s known as a Soft Inquiry, which is a way to get an estimate of your credit score without making a derogatory mark on your credit history.
- Payment History
Paying back your account balances on time is a pretty intuitive concept. If someone is loaning you money, they are expecting you to pay them back. With banks, those payments are due on tight schedules, and penalties will incur if payments are late. Making late payments hurts your credit score tremendously, so it’s important to plan them accordingly.
Tip: In general, it’s best if you only spend what you have. This means pulling out loans that are realistic to your income, and also only using your credit card if you actually have the money to pay it off immediately. Making payments on or before the due date is the single most important factor in building strong credit and keeping it.
- Account Age
Account age is an average measure of the length of time in which you’ve had some sort of credit account open. For those with no established credit, account age will inevitably be low at first, but over time this factor will help your overall credit score.
Tip: Even if you’ve had a credit account open for several years, opening up a new credit or loan account may negatively affect your credit score since it lowers the average age of your account.
- Credit Card Utilization
One of the most controllable elements of a credit score is the utilization of credit cards. Credit Card Utilization is a percentage of all your credit card balances in reference to your overall credit limit. Typically you’ll want to exceed no more than 35 percent credit card utilization to keep your credit score intact.
Tip: The best way to keep your Credit Card Utilization low is to pay off your balances as soon as they show up on your card. Not only does this help to reduce interest charges, but it builds the habit of only purchasing with money that you actually have.
In addition to keeping a low credit card balance, sometimes asking your bank for a credit limit increase will help towards improving your utilization ratio.
It takes time to build excellent credit. As long as the steps above are being followed, building excellent credit will be a fun and easy endeavor. Ultimately, paying off balances on time is the best way to ensure financial stability.