Starting with your very first credit card, everything you do involving credit becomes part of your credit history. The key to building and maintaining a good credit history is to use credit responsibly. Bad credit can get in the way of you funding your education, buying a home, sometimes even getting a job – making it vital to build good credit, and maintain it too.
Being consistently responsible in the way you handle credit can push your score in the right direction. Here are 10 ways to establish a strong credit score :
Pay Credit Card Balance in Full
If you cut your coat according to your cloth, paying off your credit card balance in full each month will be a breeze. When you do so, lenders and creditors know you are fiscally responsible. Since a strong credit score is dependent on payment timeliness, your credit score significantly improves when you consistently settle your full balances on time.
If you do have a credit card balance, handle it right. Pay off more than the minimum amount every month to settle the entire outstanding at the earliest. Avoid late payments and try keeping your balance at a reasonable level – 30% below the credit limit is considered good. In this way, even if you carry a balance, it will not hurt your credit.
Make Timely Payments
Not all your monthly payments get listed on your credit report, more so if you pay on time. However, if you become negligent with your bill payments, it lands up on your credit report, thus negatively impacting your credit score. It is therefore best not to pollute your credit report with negative records in order to build and maintain a good credit score.
Mind Your Credit Usage
The quantum of revolving credit you have versus how much you are actually using is another major determinant of your credit score. The smaller this percentage, the better your credit rating. The optimum is usually 30% or lower.
When you demonstrate that you only borrow what you can afford to pay back, future lenders/creditors know you are a responsible borrower. This makes it easier for you to get new credit/borrow money. Charging only what you can afford helps avoid excessive debt too. Further, when it comes to loans, irrespective of what lenders say you qualify for, take only as much loan as you can afford to repay.
Watch Those Credit Applications
Each time an application for credit is made, it creates a dip in the credit score, lasting for one year. This is because it is assumed that if someone is making multiple credit applications, their economic well-being will take a nosedive.
If you have too many credit cards, you end up using more credit, making it hard to keep up with the balances and payments. Therefore, too many inquiries into your credit and too many new credit cards negatively affect your credit score.
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Eliminate Unproductive Balances
A great way to improve your score is to eliminate unproductive balances, i.e. small balances on several credit cards. This strategy is your credit score’s ally because lesser the cards you have with balances, better is your score. For instance, charging Rs 2,000 on one card and Rs 1,000 on another (instead of using just one card with a better interest rate preferably) may hurt your score.
It makes sense to pay off small balances on several cards and have one or two cards for everything. This way, your credit card report will not be peppered with several scattered balances.
Have a Good Credit Mix
Having a mix of different debt types improves your score. A car loan, personal loan or any other such debt installment could work. Sometimes, buying appliances, furniture etc. on EMI can also help. However, you need to check if the finance company reports this to the credit bureaus.
Let Your Old Accounts Be
The longer you have had credit, better is your credit score. Closing an unused card account or cancelling a card can lower your score because it means you have less overall credit. This instantly raises the debt percentage capacity you are using. A long history of your good debt (debt you have paid on time and as agreed) contributes to a high credit score. Let old debt be and let your oldest (good) accounts remain open – it will boost your credit age and build good credit.
Know What’s in Your Credit Report
Another intelligent way to build positive credit history is always being aware of the exact information that reflects in your credit report. Negative and erroneous information could damage both your credit history and credit score. It is best to check your credit report regularly to see what its exact contents are.