How to Build Your Credit Score

Credit scores are important for many financing activities, from taking out loans or signing up for a new credit card to getting a cell phone plan. Favorable credit scores will help you get loans and cards with better rates, in addition to other benefits. Here are some tips to boost your credit score and get you on the path to saving more money.

What Determines Your Credit Score?

The first step to building your credit score is understanding it. There are three different bureaus that collect data to determine your credit score: TransUnion, Equifax, and Experian. They collect data on your payment history and outstanding debt, as well as other financial details. Companies then use this data to calculate your credit score. Since there is no standardized algorithm or formula, your credit score is likely to vary between the different credit bureaus. Although the scores may be different, the categories which impact them are widely used, so your steps to improving your scores will be the same no matter which score you are using. Common categories affecting credit scores include total number of accounts open, length of credit, number of inquiries, revolving utilization, and missed payments. These categories are usually weighted slightly differently, which is where the differences come in between scores.

There are many free services to check your credit score online, such as Experian or Credit Karma. These will also show which categories are impacting your score, positively or negatively. Figuring out which categories are negatively impacting your score will help you determine the most effective and actionable way to bring it up. For the categories positively impacting your score, continue doing what you are doing or look for ways to improve. One of the best ways to maintain a high score is to keep a close eye on it so you can quickly adjust to anything as you see fit.

Increase Your Score

1. Pay your bills on time. This one is pretty self-explanatory. Missed and late payments decrease your credit score, so make sure you are keeping track of which payments are due and be sure to pay them on time. This applies for payments beyond just your credit card and can also include student loans, auto loans, etc. All of these being paid on time will help you build good credit by signaling that you are a trustworthy borrower.
   
2. Open an account early in your life. A good example of this is opening a credit card at a young age and charging something simple on it, such as a monthly phone bill or subscription to a TV or music service. Begin paying off this small amount month by month, and you will begin building your credit score without much effort. When your credit score begins to matter more, you will already have a solid foundation and longer length of credit. This is also useful to think about if you have children; open them an account early, even if they are not actively using it, to give them a solid head start.
   
3. Do not open unnecessary cards. Every time a credit card is opened, the company will submit an inquiry into your credit score. An excess of inquiries will negatively impact your credit score, so do not open cards just to increase your total number of open accounts. In other words, having too much credit-seeking activity, especially in a short period of time, will be a detriment.
   
4. Don’t close unused credit cards. Keeping these accounts open helps to keep up your number of open accounts, even if they are just sitting in a drawer. This will also not impact your number of inquiries, since the inquiries only occur when you initially open the card.
   
5. Do not max out your cards and keep your balances low. This will help your revolving utilization. Revolving utilization is calculated by the sum of all balances divided by credit limit. For instance, if you spend about $5,000 a month and your credit limit is $10,000, then your revolving utilization percentage is 50%. This number is averaged for the entire year. Ratios under 30% are typically a sign of low revolving utilization and will help your credit score. One way to make sure you are spending responsibly is to create a comprehensive budget for your money.

Keep in mind that credit scores will not increase overnight and keeping a high credit score is an ongoing process. Start thinking early about how you can build credit and follow the tips mentioned above. Now that you know the best ways to build your credit score, check it frequently and get started on improving your score today.