You never know when you are going to need to take out a loan to buy something like a house or car. In order to do that, you need to have a credit history. In recent years, credit cards have become the most common first credit experience for young Americans. For instance, Forbes estimates about 73 percent of Americans acquire credit cards by age 25.
In 2021, 84 percent of the US population had credit cards. Also, based on data from TransUnion, the fourth quarter of 2022 saw 166 million Americans with credit cards, a rise from the previous three years. You’ll need good habits to convince credit bureaus to give you a good credit score, so that you can take out necessary loans. Use these tips to mange and improve your credit!
Check Your Credit Report
A credit report provides information about your current credit activities, including loan payment history and the state of your credit accounts. Knowing your credit report status from an accredited credit bureau is among the first steps in planning a strategy to raise your credit score. Avoid getting your score from credit estimator tools since some lenders prefer using only the three renowned US credit bureaus, Experian, Equifax and TransUnion. Checking your credit report regularly helps you understand your current credit position and the lenders you can approach based on your score to request a loan.
Additionally, you’ll easily trace any inaccurate or incomplete credit profile information such as credit balances, limits and contact details, which can be disputed and removed if they are incorrect. Understanding your credit score also helps you get loan repayment terms you can handle to avoid falling behind on payments.
Avoid Overspending
Credit utilization accounts for 30 percent of your credit score. It’s a key factor crediting firms consider while assessing the possibility of raising your credit score. Credit risk assessors interpret a low credit utilization rate as an indicator you’re managing your credit finances well by not overspending. The reward of keeping your credit card spending patterns as low as possible is a higher credit score.
You can calculate your credit utilization ratio by dividing your total debt by your total available credit. Ensure your utilization is below 30 percent to maintain or improve your credit score. This means using no more than 30 percent of your available credit.
Control Your Urge For New Credit
Surprisingly, credit bureaus consider having different debts such as mortgages, car loans, and credit card loans healthy for credit scores. With multiple loans, it’s concluded you can handle your debts effectively. It’s called credit mix and makes up 10 percent of your credit score.
Taking new loans while still paying off existing ones can negatively impact your credit score. The best way to prevent a low score on your new credit history (10 percent of the credit score) is to ensure you clear one loan before applying for the next.
Additionally, don’t apply for a new loan while another is still under the lending process. Lenders often monitor your application activity while processing your loan to see if you’re applying for new loans. This move can hurt your credit score because it looks like you’re stretched too thin financially and are trying to get additional sources of credit to use.
Don’t Close Your Old Unused Accounts
Did you know credit bureaus look at your borrowing history to help them determine your credit score? The average age of your credit accounts for up to 15 percent of your credit rating. Lenders, especially those offering long-term loans such as mortgages, consider your borrowing history a powerful tool in deciding if your credit score will increase.
They want to see if you have a past long-term history of paying off your debts. As long as you aren’t paying exorbitant annual fees for retaining an old account, make it an asset while applying for new loans.
Make All Your Payments As Agreed
Your payment history accounts for 35 percent of your credit score. It’s the most important thing new creditors look at to trust you with their money. Paying your debt on time prevents you from defaulting. If you mistakenly defaulted or paid behind the set date, you can first call the collection agency and make the payment to restore your good payment history.
Also, to avoid forgetting to pay on time in the future, consider setting up automatic bill payment reminders. Paying earlier than the set date can even earn you an increased credit score, so why not?
Parting Shot
Raising your credit score is one way to maintain your financial health. The top five strategies discussed here are options you can consider if you’re planning to have a positive credit history. Practicing these tips consistently can help raise your credit score.
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