A good credit score is not about bragging rights. It is an essential tool for a healthy financial situation. Unless you are independently wealthy, there are many things you will have to buy on credit. These include a house, cars, furniture and appliances. Having a major credit card or two is also helpful when making big-ticket purchases or paying for vacations. There are also times when you must have a major credit card such as when renting a car. Without question, your credit score matters. But how do you get that number up? Here are some tips to build your score.
Maintain a Low Balance to Limit Ratio
When a lender runs a credit check, you want your number to be as high as possible, at least above 700. One of the things credit agencies look at is the ratio between your total balances and the total amount of your credit limits. This includes all credit cards, mortgages, student and car loans and any other lines of credit. The ratio is expressed as a percentage, so let’s say your total limit is $1,000 and your balances are $250. Your ratio is 25%. Ideally, you want to keep your ratio under 30% to maintain a high score. The lower the better.
You can improve your ratio obviously by making payments. Paying off lines of credit completely can boost your score significantly. You can also lower your ratio by increasing your total limit. This can be accomplished by obtaining a new credit card or line of credit or getting an increase on the limit of an existing line. Just be careful not to spend frivolously with the new credit. That will defeat the purpose.
Make Your Payments on Time
The most obvious thing that you can do for your credit score is to make at least your minimum payments on time, month after month. Late payments cost you more in fees and are damaging to your score. Paying less than the minimum can also cause it to drop. If you can, pay more than the minimum. It will save you interest. This can be time-consuming, but it will help your score continually rise, provided you keep your balances in check.
Keep Paid-off Accounts Open
It can be tempting to close an account after you have paid it off especially if it has high fees. Don’t be hasty in doing so. Closing an account will lower your total limit and raise your balance to limit ratio. This will hurt your credit score. Often, when you first start out building credit, cards with high fees are your only option. As your score improves, you can get better cards with no fees. But before you dump those paid-off cards, replace them and keep your total limit from getting lower.
Have a Mix of Credit Lines
Having installment loans as well as credit cards is preferred by FICO. A mortgage, car loan or student loan is an example of an installment loan and any of these will do. Although you don’t want to have too many credit cards, having at least two is a good idea. You want to show that you can manage multiple lines of credit of varying types. This is a sure way to raise your credit score and keep it high.
Good credit is essential today. Without it, your purchasing power is limited and it can even affect getting approved to rent an apartment. Some jobs will also check your credit score. By following these tips, you can quickly build an outstanding score and maintain it. It will make your life a little easier.