December 27, 2024
Building good credit is key to opening doors and reducing financial stress. That’s because a solid credit score makes qualifying for loans, credit cards, and mortgages easier. It helps you enjoy lower premiums for car or renter’s insurance. It also makes it easier to gain approval for a rental lease, and it may even help you secure the job you’ve always wanted.
A good score unlocks financial independence, so the earlier you start building your credit — or repairing it — the better. If you’re not exactly sure how to improve your credit score, here are some simple ways to manage your finances and build credit throughout the upcoming year.
1. Understand What Goes into Your Credit Score
Credit bureaus use a mix of factors to calculate your unique credit score. While each reporting bureau has its own proprietary methodologies for coming up with your magic number, they all consider your payment history, outstanding balances, credit history length, applications for new accounts, and the types of credit accounts that you hold. The final number or score then represents at a glance how likely they think you are to repay money that you borrow.
2. Pay Your Debts on Time
Payment history is the largest factor in most credit scoring models, making up around 35 percent of your credit score. The report will show whether you’ve made your minimum payments on your credit cards on time each month, for example, or you’ve been late or missed payments. It will also indicate if you’ve made timely payments on installment loans like student loans, auto loans and mortgages.
Utility companies and cell phone providers may also report late payments to the credit bureaus. Setting up automatic payments or payment reminder alerts can help ensure you don’t miss critical due dates. If a bill does get lost in the mail, for example, or the transition to paperless causes you to miss a date, reach out to your creditor immediately to pay the bill and inquire about waiving any fees or penalties you may have incurred.
3. Use a Budget as Your Guide
Before you borrow money or make a purchase, you have to know what you can afford to pay back. Even small purchases can add up — especially if you’re unable to pay off balances each billing cycle. Having a monthly budget that lists all of your regular necessary expenses gives you real figures to work with.
For credit card purchases, realistically, you need to be able to make more than minimum payments to be able to pay off balances. Ideally, you’ll be able to pay off credit card balances monthly. Keeping an active working budget can also help ensure that you don’t miss any bills. In most cases, you are still responsible for paying the debt even if you don’t receive a bill or statement.
4. Stay Within Credit Limits
One of the most significant aspects of staying within your credit limits is paying attention to your credit utilization ratio. The ratio measures how much credit is available to you versus how much of it you’re using. The golden rule is to keep your credit utilization rate under 30 percent of your limit.
Even if you make all your payments on time, maxing out your credit cards, for example, can signal a riskier profile to lenders and can lower your credit score. Keep in mind that if a creditor reduces your credit limit, it can make your utilization ratio higher, but if a lender increases your credit limit, it can actually lower your utilization ratio.
This is also a reason not to close inactive accounts. Accounts in good standing that you don’t really use much help with your utilization ratio. Closing them leaves you with less available credit.
5. Keep Debt in Balance
Debt comes in two forms — installment debt and revolving debt.
○ With installment debt, you borrow a fixed amount and repay it over a period of time with regular payments. The balance decreases over time, and you eventually pay off the account.
○ With revolving debt, you have a credit limit and can borrow up to that limit as needed. You’re required to make at least minimum payments, but balances carry over from month to month. There’s no fixed repayment term, so the debt can stay open as long as you keep the account active.
Ideally, you should carry a mix of each type of credit. Often, student loans are one of the first types of installment debts people take on. Revolving debt is most often in the form of credit cards. Revolving debt can be especially challenging because of how rapidly it can cause credit utilization ratios to fluctuate.
6. Speak with Creditors If Needed
If you’re facing financial difficulty, reaching out to creditors can be a smart move to protect your credit score. Many creditors offer hardship programs that can temporarily reduce or pause payments, and you may be able to negotiate an agreement that waives interest, lowers the interest rate, or allows you to postpone or reschedule payments.
You may also be able to consolidate multiple debts and payments into one loan with a lower interest rate and payment. Continuing to make minimum payments on time while making alternative arrangements is important to keep your accounts in good standing and avoid penalties.
7. Create or Improve Your Credit History
Especially for young people, establishing a credit history can be hard because if you don’t have any debt, you don’t have a credit history. Or, if you’ve had financial difficulties in the past, you may be struggling to improve the history you have. One option is to open a prepaid credit card account.
You pay what is essentially a security deposit up front. Your credit limit usually correlates to the amount that you deposit. You can then use the card like any other credit card, and you get a monthly bill that you must pay just like a traditional card. If you decide to close your account, you get the deposit back.
8. Check Credit Reports Regularly
A credit report does not include your actual credit score. However, you need to ensure that the information that appears on your credit history is accurate because that is the information that the credit reporting companies will use to calculate your score. You are entitled to get a copy of your credit report every 12 months from each of the major credit reporting companies — Experian, TransUnion. and Equifax — through AnnualCreditReport.com.
You can also request a free report if a lender denies your application for credit, insurance or employment based on information in your credit report. Free reports are also available for individuals who are unemployed and planning to look for a job within 60 days, individuals who are receiving public assistance and individuals who are dealing with credit report inaccuracies due to possible fraud.
9. Know Your Credit Score
Since each reporting agency has its own model for calculating a score, your numbers may differ slightly, but they’re usually similar and can provide a good understanding of your current credit standing. Many financial lenders offer free credit scores to their customers as part of their online banking or mobile app services.
Likewise, when you’re applying for a loan, the lender may provide you with your credit score as part of the application process. Otherwise, you can usually obtain your score for a fee from the three major credit reporting bureaus or through the FICO website. Some credit monitoring services may offer free credit scores.
Nonprofit credit counseling agencies may also offer free or low-cost access to your credit score as part of their services.
Build Your Financial Future with La Capitol
The end of one year and the beginning of the next is the perfect time to take a thorough look at your credit report, credit history, credit score, and financial goals. If you’d like to learn more about how to improve your credit score and productive ways to build credit, La Capitol Federal Credit Union has all of the resources and credit-building financial products you need.
We offer educational tools to help you make the best financial choices for you, loans for every significant life event and credit cards for all of your everyday activities. Explore all that we have to offer to make 2025 your best year yet.