Good credit is very important as bad credit can prevent you from buying a home, financing your education, or even getting a job. Therefore, it’s important to build good credit as soon as possible.
1. Borrow what you can afford
A credit card is not a license to buy things you can’t afford. Using a credit card responsibly is the best way to build good credit. This habit allows future lenders and creditors to see that you are a responsible borrower. You will find it easier to borrow money and obtain new credit when you show that you have the discipline to borrow only what you can afford. Not only that, but it also helps you avoid excessive debt.
2. Use a small percentage of your available credit
Maxing out your credit cards or getting close to your credit limit is irresponsible, especially if you don’t plan to pay off the balance in full at the end of the month. Lenders know that borrowers who max out their credit cards often struggle to repay borrowed amounts. Your credit score is also affected when your credit card balances are high and you do not pay them off. It is best to keep your balance low compared to your credit limit to build good credit.
3. Start with just one credit card
It’s easy for first-time credit card users to accumulate a bunch of credit cards in the early years of credit usage. Be cautious and do not open too many credit cards too quickly. The more credit cards you have, the more likely you are to use them and have difficulty keeping track of your balances and payments. Multiple inquiries on your credit and several new credit cards can negatively impact your credit score. Credit inquiries account for 10% of your credit score, and opening new credit cards reduces your average credit age, which is also a factor that constitutes 10% of your credit score. Take some time to learn how to manage credit responsibly and apply for new credit cards carefully.
4. Pay off your credit card balance in full
If you are using your credit card only to buy what you can afford, paying the balance in full every month should not be a problem. Paying off the balance in full each month demonstrates that you are capable of paying bills, which is something creditors and lenders look for. Since a significant part of your credit score relies on timely payments, paying your balances on time improves your credit score. Paying off the balance in full each month also helps you avoid accumulating debt on your credit cards.
5. Make all payments on time
Not all of your monthly payments are listed on your credit report. Bills that are not regularly reported to credit bureaus will not affect your credit score as long as you pay on time. However, any bill may show up on your credit report if you are late on payment and the account is sent to a third-party debt collection agency. Avoid adding negative accounts to your credit report to build good credit. It can be difficult to overcome serious delinquencies like debt collections.
6. If you carry a balance, do it the right way
Carrying a balance on a credit card is not necessarily bad as long as you are paying more than the minimum each month to pay off your balance as quickly as possible. Avoid delaying payments on your credit card and continue to keep your balance at a reasonable level (below 30% of the credit limit) to maintain good credit.
7.
Let Your Accounts Age
The longer you have credit, the better it is for your credit score. Keep your old accounts open as they help increase your credit age and build good credit. Closing an old account will not immediately remove it from your credit report, but after several years, credit bureaus will remove old and closed accounts from your credit report.
Frequently Asked Questions (FAQs)
What is a good credit score?
Credit scores range from 300 to 850. The higher the number, the easier it is to obtain a credit card or loan with a low-interest rate. Generally, a score above 670 is considered good, while a score above 760 is considered very good. A score of 800 or above is excellent.
How long does it take to build good credit?
Building good credit is an ongoing process. If you find errors on your credit report, fixing them will likely improve your credit score once changes are made. However, this process can sometimes take weeks or months. If you are waiting for the removal of negative items from your credit report, it may take several years. The quickest way to improve your credit score is by paying off a significant outstanding debt, such as a credit card balance.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Fair Isaac Corporation. “Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO Score?”
Experian. “Collections on Your Credit Report.”
Experian. “What Is Credit Utilization?”
Experian. “When Do Closed Accounts Get Removed?”
Source: https://www.thebalancemoney.com/ways-to-build-good-credit-960109
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