By Allan Halcrow | American Express Credit Intel Freelance Contributor
6 Min Read | January 17, 2020 in Credit
You’ve set your sights on some R&R in Hawaii and need to build your credit to make it happen. Or maybe it’s a new car you covet. What do you do?
Building credit, by its nature, takes time. Time to take action that has impact, and time for creditors to report that impact. That said, there definitely are some best practices to build credit that many experts recommend. Acting strategically, you can shave months off the credit-building process.
If someone asked for driving directions but couldn’t tell you where he was starting or where he was headed, could you help? Of course not. And yet many consumers don’t know what credit score they need or what they have now. For example, the average credit score to get a new car loan is 713, and 662 for a used car—and your score affects not only whether you get the loan but what interest rate you pay.1 Do your research. Then find out what your credit looks like now.
There are three major credit reporting companies (Equifax, Experian and TransUnion) and you’re entitled to a free report from each once a year. You can request a report directly from the agency, get it from FTC-approved annualcreditreport.com, or use a paid service. Why pay for something you can get free? Because you can get more. Free reports may not include your credit score, for example.2 The price may include credit monitoring and give you access to your report any time, not just once. Shop around—not all services provide all three reports, which is useful because they sometimes show different things.
Next, review your credit report. Carefully. Credit reports are not infallible, so look for debts that are not yours, outstanding balances that you believe were paid, and other errors. You can dispute anything that you believe is incorrect. But be aware that open (unresolved) disputes can work against you when applying for a mortgage.3
Late payments do serious damage to your credit score. But if you slipped up just once there may be hope, especially if you have a long or good relationship with the creditor. You’ll have to keep at it, but you may be able to persuade the creditor to make a goodwill adjustment and remove the late payment.
The Fair Isaac Company (you may know it as FICO) says that about 30% of your credit score is based on how much you owe. That portion of the score considers two things: The total you owe and the portion of your available credit that is used. Paying down balances takes action on both.
A key best practice for building credit is to forget about the minimum payment. It’s better to pay as much as you can as often as you can. If raising your credit score is your top priority, you may wish to consider a second job or side gigs to give you more income. The faster you can get to zero balances the better.
But if you pay for everything with a credit card and get close to, or hit, your limit before paying off the full card balance each month—as people who use rewards cards sometimes do—consider paying twice a month instead of once. Otherwise, your credit report may consistently show you at your credit limit, which hurts your score.
That “portion” of your available credit that’s used up is called your “credit utilization rate”—and it matters. A lot. To keep that section of your credit score healthy, experts say to avoid using more than about 30% of your credit limit.4 The best way to do that is to pay down the balance until you hit that target.
But if you can’t afford to pay down the balance, or you want an extra boost to your score, there are other things you can do. For example, one of the best ways to build your credit is to seek an increase in your credit limit. Let’s say you have a $500 credit limit and a $300 balance. Your utilization rate is 60%. But getting approved for an increased limit of $1,000 instantly drops your utilization rate to 30%—on the same balance! The same thing happens if you open a new credit card with another $500 credit limit. Of course, using either approach to increase your credit limit is only wise if you’re a responsible enough card member to keep spending in check, or to manage the payments should you ever actually reach the new higher limit.
If an account is turned over to a collection agency it’s a big red flag to lenders. You’ll want to get those paid ASAP. But you may not want to just send a check for the balance because that alone may not help your score much.5 Instead, reach out to the collection agency and negotiate to pay the balance in exchange for having the debt removed from your report—it’s called a “goodwill deletion” request.
Until recently, only borrowing (and repaying) could really help your credit. But now some services will give you credit for other bills you pay. With some caveats, for example, Experian promises an “instant” boost to your score by reporting payments to your utilities and phone company that you may not otherwise get credit for.6 Other services similarly report rent payments.7
Good credit is like trust: It takes a long time to establish and the blink of an eye to destroy. But you can make a long credit-building process shorter by developing a strategic plan and sticking to it. If you’re ready to build your credit score now, act on these seven best ways to build your credit—and sit back and watch it climb!
1 “What Credit Score Do you Need to Buy a Car?,” NerdWallet
2 “How to get free credit reports from each of the three credit bureaus” Fair Isaac Corp.
3 “Home Loan Credit Problems: Unresolved Borrower Debt,” FHA News and Views
4 “What Is a Good Credit Utilization Ratio?,” the balance
5 “Remove Debt Collections From Your Credit Report,” the balance
6 “Only Experian can raise your FICO® Score instantly,” Experian
7 “How to Report Rent Payments to a Credit Bureau,” TheBalance