Tips for Building and Maintaining a Strong Credit Score
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If you’ve been dealing with the burden of credit card debt for a long time, it can easy to just think of credit cards as a bad thing. However, if used responsibly, your credit card can actually be an important financial tool in achieving your personal financial goals. This is especially true if you have a strong overall credit score.
Your credit report—as well as your FICO credit score— is synonymous with your creditworthiness. This factor plays a powerful role in various financial products and services. As such, it behooves you to build and maintain a strong credit score if you want to set yourself up for success with reporting agencies and lenders.
It’s easy to think of your credit score as just a nebulous number, but there are factors used to calculate it. This makes it possible to make an action plan to improve your credit score and build your creditworthiness.
What does it take to get the best credit possible? How can you maintain a high credit score once you’ve achieved one? And what are some common missteps consumers make along the way when it comes to credit utilization? Keep reading for tips, tricks, and the benefits and drawbacks of having excellent credit.
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Understanding your credit score
Factors that play a role in your credit score
The main factors that impact your credit score include:
- Credit utilization
- Payment history
- Length of credit history
- New credit applications
- Hard inquiries
- Your credit mix
That sounds like a lot to juggle, but the most important factors are your credit utilization rate as well as your on-time payments. Missed payments are some of the things that can hurt your credit score the most, so it’s important to pay attention when payments are due.
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Types of credit scores
When it comes to your credit report, three main credit bureaus report on your score. These are TransUnion, Experian, and Equifax. It’s also worth noting that in addition to the main three credit reporting agencies, there are different kinds of credit scores that each bureau calculates. Two of the most common include:
- VantageScore - This is TransUnion’s proprietary way of calculating creditworthiness which ranges from 300 to 850. A score of 661 and higher is considered good.
- FICO Score - The FICO score (short for Fair Isaac Corporation) ranges from 300 to 850 and is used by about 90% of lenders. A score of 670 or higher is considered good.
Keep in mind that different reporting agencies also have certain tricks or features you can use to help improve your credit score. For example, through Experian Boost, you can have utility bills and rent payments factor into your on-time payments and improve your score.
Free resources
So, how do you find out and monitor your credit score in the first place? You can get a free credit report from a resource like annualcreditreport.com to see how you stack up with each of the three credit reporting agencies. From there, you can look for factual errors and create a benchmark from where you’re starting your credit journey.
What factors can improve your credit score?
Improving your credit score will take time. Even so, it’s well worth the investment of energy and money since there are a variety of benefits that come from focusing on ways to build credit. While not all of these can be done in a short period of time, they all have an important role to play in improving your score.
Your overall credit utilization
Put simply, your credit utilization is how much of each line of credit you use. If your credit limit is $5,000 across two separate cards, and you use $4,000 of that available credit, your overall credit utilization is 80%.
An ideal credit utilization amount on each statement is, of course, 0%, since that means that you are paying off your cards in full each month. However, typically anything under 30% of utilization will help improve your score. In the example above, you would need to pay down about $2,500 of debt to reach the 30% utilization range.
You can also potentially increase your credit limit to inflate your utilization artificially. For example, if you have a $3,000 limit and use $2,000 of that credit (66%), an increased limit to $4,000 can quickly drop your utilization to 50%. If you take this tactic, be wary of spending up to that limit; it can be easier than you think to dig deeper into debt.
Ultimately, paying down your credit cards is the best way to improve your credit card utilization.
Your payment history
Payment history is a huge factor in your overall credit score. For example, on-time payments and consistency account for 35% of your overall score when calculating your FICO score. This is why even one missed payment can really derail your credit journey.
The best way to stay on top of your payment history is to avoid late payments. This can be easier said than done if you have multiple cards and loans you’re juggling; however, it is important to at least make the minimum payment in order to stay in good standing.
Budgeting for your monthly payments can help you stay on top of your payment history without falling behind. Additionally, setting up automatic payments ensures you’ll never miss a payment.
If, for some reason, you do miss a payment by a day or two, see about reaching out to your bank and making the payment. If you ask, you may have them waive the late fee and keep the payment from hurting your credit.
Length of your credit history
How long you’ve been making payments and having accounts open is also a factor to consider when improving and maintaining your credit score. While you can’t jump into the future, keeping old accounts around rather than closing them is one helpful way to leverage your payment history.
If one of your parents puts you as an authorized user on one of their old accounts, that is a simple way to increase your payment history. You should just make sure that the person in charge of that account is on top of making on-time payments and handling their card responsibly. Otherwise, you may wind up inadvertently hurting your credit!
Any new credit applications
If you have too many applications for new accounts on your credit report, lenders may see this as a sign that you aren’t responsible for your credit. These credit inquiries may be hard or soft, which refers to how long they take to “fall off” your credit report. A hard inquiry will stay on your account for two years. A soft inquiry may stay on your account for 12 to 24 months.
The best way to avoid racking up new credit applications is to avoid any and all credit inquiries that you can. That may mean saying “no” to the new credit card opportunity at the Apple Store or Sephora, which can be difficult. However, once you’ve improved your credit score, you’ll be able to take advantage of lower interest rates should you be interested in applying for one of those specialty retail cards.
Your credit mix
Your credit mix is about more than just if you have credit cards and student loans. Your credit mix also signals to lenders that you can handle various types of credit.
Revolving credit accounts refer to credit card balances since these can fluctuate monthly. On the other end of the spectrum are installment loans like auto, student, and mortgages. Having a mixture of these can showcase your ability to responsibly juggle different types of debt.
If you only have credit cards or installment loans, it may be worth opening a secured credit card or taking out a credit builder loan to improve your credit mix. These financial products are designed explicitly with credit building in mind, so they will be easier to manage while you look to build your credit.
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How can you maintain a good credit score?
Improving your credit score is only half the battle. Once you’ve built up your credit, use the following tips and strategies to maintain your credit score.
Don’t pay late
As was mentioned earlier, late payments can have a huge effect on your overall credit score. As such, setting up automatic payments to avoid late payments is a powerful way to maintain good credit once you’ve established it.
Monitor your credit
Monitoring your credit is about more than looking out for identity theft. When you take an active role in looking into your credit score and the factors impacting it, you pay attention to your finances more. This can help keep you in the right mindset for maintaining good credit.
Keep hard inquiries in check
While there are certainly times that you’ll want to leverage your improved credit score in order to open a new line of credit or apply for a mortgage, it’s a good idea to keep these kinds of hard inquiries in check. Since they can take two years to fall off your report, you don’t want too many sticking around.
Don’t close older accounts
Length of credit history matters. As such, it’s important that you don’t close older accounts — even ones you’ve fully paid off. It may be useful to put a small recurring charge, like a utility or your Netflix subscription, on an older card just so it’s viewed as something you’re “actively” using. Of course, a simple small charge like Netflix is something you’ll easily be able to pay off each month, so you’ll never have to worry about carrying a balance.
Don’t max out your accounts
Once you’ve paid down your credit, it can be easy to see what fresh credit could do for you. It’s important not to max out all of your accounts once you’ve just paid them off. If you do—and you’re unable to pay that debt down—you may wind up yo-yo-ing back and forth between being debt free and under crushing debt.
Remember that managing your credit responsibly is as much about building good habits as it is about willpower.
Don’t make only minimum payments
Suppose you’re focused on debt paydown methodologies like the snowball method or avalanche method. In that case, you’ll make minimum payments as you focus on aggressively paying down one credit account at a time.
Once you’ve paid off your cards, it’s important to pay accounts down each month in full. Otherwise, you will carry a balance and pay interest on your balance.
Costs
Opportunity costs
Building and maintaining a strong credit score doesn’t cost you anything other than the money you use to pay down your debt. As such, opportunity costs are the only things you’ll need to weigh as you consider the “fees” you must juggle when working to build and maintain a strong credit score.
While it might hurt to avoid eating out as much in the short term, your credit score will thank you in a few months when you’ve successfully paid down a substantial amount of your debt.
Pros and cons
Pros
- More power as a borrower. If you have poor credit, you have limited options as a borrower. This means that not only is it more difficult to take out a loan or find a lender, but it also means that your interest rates and the terms of your agreement will be worse. Improving your power as a borrower is thus a great benefit of improving your credit.
- Flexibility in your personal finances. If you need to take out a loan in an emergency or move to a new apartment, having a good credit score gives you more options. As such, this gives you the flexibility you wouldn’t otherwise have if you were saddled with debt and minimum payments. For example, if you have $400 of minimum payments each month, paying down your debt, in effect, accounts for a $400 monthly raise to spend as you’d like!
- Easier approvals. Since your credit score is for more than just loans and credit cards, there are other benefits to improving your credit score outside your immediate personal finances. For example, if you’re applying to rent an apartment, your approval will be much smoother if you have a good credit score.
Cons
- Can lead to tunnel vision. While it’s important to focus on your credit score, once you’ve established good credit, it can be tempting to develop tunnel vision about your score. While tunnel vision is helpful to achieve your goal of having a great credit score, allowing yourself to reap the benefits of a good credit score is just as important. Resist the urge to become a penny-pincher or you may have a less enjoyable financial life.
- May require making short-term financial sacrifices. As was mentioned earlier, the opportunity costs necessary to earn a strong credit score can be difficult to handle. While making short-term financial sacrifices can contribute to FOMO, or “fear of missing out,” when you pay down your debt, you will have a lot more financial freedom.
- Takes time and energy. For some consumers, paying down their debt and improving their credit score can take years. Maintaining that kind of energy over a long period of time can be draining — but not as draining as the stress of having limited financial opportunities due to poor credit and a high level of debt.
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The bottom line
Your credit score is more than just a number. With a good credit score, you can be easily approved for a mortgage, auto loan, or some of the best rewards credit cards. Beyond flexibility, a good credit score also enables you to qualify for lower interest rates, saving you thousands of dollars each year. With a bad credit score, your options are much more limited.
When it comes to building and maintaining a strong credit score, focusing on debt paydown and on-time payments are two of the most important factors to keep in mind. These can sometimes account for 65% of your overall credit score, so tackling these two areas first can make a world of difference in your credit score.
Of course, some sacrifices will need to be made as you work to improve your credit. While it takes a mixture of discipline and forging better habits, this kind of work can ultimately set you up for success while maintaining your strong credit score. Improving your credit can open up a world of new possibilities — from free vacations using the best travel credit cards to a competitive mortgage rate. As such, it’s worth the time, energy, and effort necessary to build your credit and set your future self’s personal finances up for success.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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