Anyone new to the world of credit is probably looking to give their FICO score a boost. But how do you do it?
Fortunately, credit is not as mysterious as it may seem. If you are properly educated on how it works and manage accounts responsibly, your credit score will rise.
Here are some straightforward ways to establish stellar credit:
1. Start with your credit report
This is a fairly simple step that many consumers overlook. Even though you’re new to the world of credit, you may still have a file with the three major credit bureaus.
For example, you may have a report if you are paying down student loans.
Credit reports sometimes contain inaccuracies, or they could indicate fraudulent accounts taken out in your name as a result of identity theft.
2. Don’t fall for the first credit card offer you receive
If you sign up for a credit card with a big annual fee and an exorbitant interest rate, you could end up wasting lots of money. Instead, look for cards that reward you with cash back or points for spending money on things you normally buy.
Don’t apply for a lot of cards, because credit inquiries account for 10 percent of your FICO score. Excessive inquiries will drive down your score.
Stuck with a shabby piece of plastic? Pay off the balance, but avoid closing the account, because that could also damage your credit score.
3. Work your way up
If you have a difficult time getting approved for a regular credit card, consider a secured credit card. But be prepared to make a cash deposit that will be equal to the low credit limit on the secured card. And read the fine print to confirm that the costs don’t outweigh the benefits.
You can learn more about these cards in the story “The Truth About Secured Credit Cards.”
As you establish a record of responsible use of your secured card, the company may offer you a regular credit card. Or you can apply for another credit card once you have a solid record of using your secured card.
4. Make timely payments
Penalties, in the form of fees and a higher interest rate, aren’t the only result of delinquency. One late payment can send your credit score plummeting.
Credit card and loan issuers usually give you 30 days to bring your account current before reporting your late payment to the credit bureaus. But make it a habit to always pay before the due date. Making on-time payments is a significant part of your credit score.
If you’re having a tough time keeping up, consider using a bill-pay service or automatic withdrawals. Or, set up payment reminders on your phone or any other electronic device you use frequently.
5. Keep your balances low
Your credit utilization ratio accounts for 35 percent of your FICO score, so think about that before you swipe your card. Experts recommend that you use no more than 20 percent of your credit limit.
Don’t think you’re immune to this rule if you run up the card but then pay off the balance each month. The credit bureaus often do get a report about that, but they’re much more interested in how much you charge. The fact that you pay off your balance has little if any impact on your credit score.
Along those lines, don’t turn to credit card cash advances if you’re crunched for cash. Tap your emergency fund, sell some idle goods lying around the house, cut the extras, or pick up a side gig to generate extra income.
Your credit card is not an all-access pass to the ATM, and it shouldn’t be viewed as such. Cash advances come with a fee, a higher interest rate and no grace period, which means the interest starts to accumulate immediately.
6. Pay attention!
While you’re on the credit building journey, remain vigilant about your credit card statements and credit reports. (You can get one free report a year from each of the three major credit bureaus.) Consumers tend to become fascinated with their three-digit credit score, rather than the actual information used to calculate the figure.
Keep in mind that there are other ways to build credit. See: “7 Ways to Build Your Credit Score Without a Credit Card.” Most importantly, know that this is not an overnight job. Establishing stellar credit takes time and patience. But if you practice responsible credit use, your efforts will be rewarded.
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