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How to Build and Boost Your Credit

“Good credit” --people talk about it all time, but exactly what is it they’re talking about? Considering how important it is to your financial health and future, it’s time we defined some basic terms and offered some tips to make sure you (and your credit score) have got what it takes to get you what you want. 

At the most basic level, having “good credit” means you have a financial history that demonstrates your ability to successfully borrow money and pay it back on time (and yes, using a credit card is technically “borrowing” money). And if you’ve ever applied for a loan--for college or a home or anything else--then you probably recall the loan officer talking about your credit score...you know, that mysterious number that maybe meant not much to you, but everything to them. So, what actually is a credit score and why is it so important? 

The foundation of your credit score is based on categories of your credit history. Each category accounts for a specific percentage of your credit score, including payment history (35%), total amount owed (30%), length of credit history (15%), types of credit (10%) and new credit & credit inquiries (10%).  

Using these categories, the credit score (a model created by the Fair Isaac Corporation and commonly referred to as FICO), is represented with a three-digit number on a 300 to 800 range that signifies how likely the potential borrower is to repay the loan. The bank then determines not only if the potential borrower qualifies for a loan, but what the interest rate will be based on using these five categories: Excellent - 850-800, Very Good - 799-740, Good - 739-670, Fair - 669-580 and Poor - 579-300. 

For example, potential borrowers with a credit score of 700 or above receive lower interest rates, better loan terms, credit cards, insurance discounts, and more options for housing. The score also affects everyday services like cell phones, cable and even some utilities. Scores also influence lenders to change the interest rate or credit limit on a credit card. 

Now that you’re in the know, here are 7 tips to boost your credit score based on recommendations by Experian, one of the world’s top consumer credit reporting agencies: 

1 Payment History — The most influential portion of your credit score at 35%, this might also be the easiest to control since it’s as simple as paying your bills on time. Basically, your credit score can drop when you miss a payment or are even late by a few days. Conversely, when you have a long history of paying your bills on time, your score will get higher. If you have trouble remembering when a bill is due, most companies let you pay with an automatic payment. If that specific company doesn’t provide that service, some banking institutions have online settings to automatically pay your bills on time. 

2 Credit Utilization Ratio — Believe it or not, using (not maxing out) your credit cards actually boosts your credit score. Try using only 30% of your available credit, however, the best scores are often achieved by using less than 10%. For instance, if your credit card has a $10,000 limit, having a balance of $1,000 gives you the best score. 

3 Number of Accounts — This scoring method looks at how many credit accounts you have open and how many are carrying a balance. While this may seem counterintuitive, if you have credit cards open from banks, stores or gas companies that you never use anymore, it’s better to keep them open than to close them. It’s beneficial to have more open accounts that have a zero balance than fewer all carrying a balance. 

4 Credit History — The longer you’ve had, and have been using, a credit card helps with your credit score. Basically, your older cards are helping you the most, so obviously, there’s not much you can do to boost your score in this category except not to cancel them as stated in #3. 

5 Credit Mix — This is something you have a lot of control over. A mix of credit debt has a major impact on your score. Secured debt, such as home loans, home equity lines of credit, car loans and small business loans can really boost your score, while unsecured or revolving debt, such as credit cards, medical debt, and student loans adversely affect your number.  

6 Credit Inquiries — When asked at checkout if you’d like to open a credit card that day to save a certain percentage, little did you know, but just applying hurts your credit score. Once you fill out the application and it’s submitted for immediate review, a request is being made about your credit report. This type of ‘hard inquiry’ about your credit score will lower it a bit. Basically, the few dollars you may be saving at the point of sale are probably not worth the lowering of your credit score. 

7 Negative Credit Information — if you’ve ever filed for bankruptcy or a loan has gone to collection, this type of negative report can lower your credit score as well. Besides loans, this may also include unpaid child support or defaulting on a loan.   

The above are solid ways to maintain your credit score (or improve it over the long run), but what If you need to boost your credit score faster...even up to 100 points in just a few months? Here are 9 ways from Nerdwallet to start rapidly boosting your score today: 

1 Pay Down — Start with the credit card with the lowest balance and pay it off quicker, trying to get to only 7% utilization of your credit line. Instead of paying an equal amount to all cards, getting credit cards anywhere below 10% can increase your credit score faster. 

2 More Credit — Call each credit card and ask for higher credit limits. When your limit goes up, but your balance stays the same, you instantly lower your utilization rate, which boosts your credit score. 

3 Piggyback — Ask a trusted relative or friend with excellent credit if you can become an authorized user on their accounts. They don’t even have to let you use their card or even know the account numbers. By piggybacking on their good credit clout, you’ll quickly boost your credit score.  

4 Timeliness Counts — Pay everything on time, as late payments can stay on your score for more than seven years. If you are more than 30 days late with a payment, call immediately and ask what you can do to not have the delinquency reported.  

5 Review & Dispute — Get free reports from the three major credit bureaus, then review them to make sure they agree with your credit card and loan statements. You may have missed payments without even knowing it, or an agency may be misreporting activity on your account. Then, immediately dispute any discrepancies.  

6 Face the Music — If you’ve become delinquent on a debt, the best thing you can do is pay them off any way possible. Depending on your circumstances, you may be able to persuade the collection agency to stop reporting the debt once you pay it off. 

7 Pay Upfront — Use a secured credit card, which is backed by a cash deposit, to make payments just like using a regular credit card. You can deposit funds up to your credit limit and build credit by improving your depth of credit. 

8 Extra Credit — Not all of the reporting agencies count rent payments toward your credit score, so inquire with a rent reporting service to add your on-time rent payments to your credit score. Even if your potential lender doesn’t include it into your credit score, the report will show that you’ve made every rent payment on time, which looks good for your payment history. 

9 Mix it Up — Since credit cards and other unsecured debt can adversely affect your score, look for a loan that can boost your credit score, such as a credit-builder loan. This type of loan helps people with little or no credit history build credit. The amount you borrow is held in the bank while you make payments. You can’t access the money until the loan is fully repaid.  

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