Building and maintaining a healthy credit history is an important financial goal. It can help you qualify for loans and receive lower interest rates.
The best ways to build a strong credit history include paying bills on time (ideally, setting up automatic payments), keeping utilization low and maintaining a mix of account types. You also should avoid frequent hard inquiries into your credit report, as those can hurt your score.
Pay Your Bills on Time
Paying bills on time is one of the most important things you can do for your credit score. In fact, payment history makes up 35% of your FICO score, so missing just a couple payments can significantly drop your score.
Using a calendar, scheduling app or payment reminders to ensure you always pay your bills on time is a good way to stay organized and avoid late fees. It’s also helpful to set up autopay if you can, so that the bill is automatically charged to your bank account on or before your due date.
If you have trouble paying your bills on time because of how your due dates fall in relation to paychecks, it’s worth contacting creditors or bill providers and asking for the due date to be moved to better align with your cash flow. It may require some extra effort, but consistently paying your bills on time will help your scores improve.
Keep Your Credit Utilization Low
One of the simplest and most effective ways to keep your credit score high is to limit how much you use of your available credit. This is known as your credit utilization rate and is a key component of the FICO(r) Score, used by 90% of top lenders. It accounts for 30% of your score, so it’s important to keep this metric low (ideally, below 30%).
Keeping your credit card balances low helps you build a stronger credit profile. It shows lenders that you can manage your debt and pay it off on time. This can help you qualify for lower mortgage rates and reduce your annual percentage rate (APR) on future loans, saving you thousands over the long term.
You can calculate your credit utilization rate by adding up the amount of debt you owe across all your credit cards and dividing it by your total credit limits. It’s important to monitor your credit utilization regularly so that you can stay on track with your goals.
Avoid Closing Old Credit Accounts
If you have a credit card that is collecting dust in your wallet or drawer, it may be tempting to close the account. However, doing so could negatively impact your credit score in two different ways. First, closing the account will reduce your available credit, which can cause your credit utilization ratio to rise. Additionally, closed accounts remain on your credit report for around 10 years and can have an effect on your average credit age.
In addition, your credit score is calculated using five core categories: payment history, amount owed, length of credit history, credit mix and new credit. Closing an old credit card can hurt your credit scores in the form of a decreased average credit age or a higher debt-to-available credit ratio, depending on which scoring formula is used. In addition, you could lose any accumulated rewards or benefits that the card offers if you close it. Therefore, only close your credit cards if it makes financial sense to do so.
Get a Free Copy of Your Credit Report
Under the Fair Credit Reporting Act, you are entitled to one free credit report from each of the three nationwide consumer reporting agencies — Experian, TransUnion and Equifax — each year. The reports include personal information like your name, address and social security number; public records related to debt (like bankruptcy filings); and inquiries by creditors or marketers.
Errors on your credit report can drag down your credit score, so you should check for errors regularly – especially before applying for new credit. Any time you apply for credit – which prompts a hard inquiry on your report – your score takes a small hit, so try to avoid new credit applications unless they’re absolutely necessary.
By taking the steps outlined above, you can work toward a healthy credit history and an even healthier financial future. And be sure to check your credit reports often — they’re the key to understanding how all of your financial decisions are impacting you.