Many of us have heard of a credit score, and know at least to some degree that it’s important to keep it healthy should you ever need a loan for a car, home, or any other major expenditure. But a lot of us probably struggle to understand what exactly affects our credit. What makes my credit go up? What makes my credit go down? How do I increase my credit score? We all want to know what factors into our credit score so we can take the right steps to keep it healthy.
Well, here are a few major things always remain important and will always affect your credit.
- Payment History – Very high impact
- Age of Credit – High impact
- Utilization – High impact
- Negative Marks – Medium impact
- Credit Inquiries – Low impact
- Available Credit – Low impact
But maybe you’re thinking these are still just broad categories. If you’re looking to build your credit score, you probably want specific action steps you can take.
Well, actually there are specific action steps you can take, and really, most everything you can do to increase your credit score is pretty easy and completely common sense. Of course, though, there are still some other factors that are less obvious that would be extremely helpful to know.
Here is a list of 45 rules to follow that will help you increase your credit score and keep it healthy.
Rule #1: Always pay your loans on time
This is an obvious one but also the most important. The primary point of a credit scores is to give lenders a way to assess your ability to pay back a loan. A single missed payment on any loan with your name on it will hit your credit score and hit it hard. Never miss a car loan, mortgage payment, student loan payment, or any major loan that’s tied to your credit. Set calendar reminders for payments and stay on top of any open accounts. A missed payment can stay on your credit report for a long while.
Rule #2: Always pay your credit card on time
This is very similar to Rule #1. But, some of us might not see credit cards as loans or understand that credit card purchases are made with borrowed money. You have to pay off your credit card in a timely manner, just as you would any other loan. Don’t ever miss or forget about a credit card payment.
Rule #3: Be proactive in reaching out to a lender if you feel you may miss a payment
Whatever you do, try to avoid making a late payment. It’s better to make a minimum payment than no payment. But if you know you absolutely cannot make any payment, see if you can work out a solution with the creditor before the bill is due. Sometimes a lender or money issuer may work with you to find a solution, if you make an effort to fix a payment issue before it arises. This is sometimes true with mortgage payments, too. After all, the lender would rather be paid back than not paid at all.
Rule #4: Set a budget
In many cases, people get a hit on their credit score because they lose track of their spending and are unable to make the payments when the bills come. Sit down and take the time to know how much you make and what your fixed expenses are for each month. Then create a budget and limit your spending to match. Don’t put yourself in a position where you can’t afford a payment. If you can’t afford something, then don’t get it. This won’t increase your credit, but it can prevent you from being in a scenario that could cause your credit to drop.
Rule #5: Save a cash safety net
Life is unfortunately always filled with unexpected surprises. But without any cash savings, anything that’s unexpected is an emergency. Budget in some cash savings so you have some padding should something unexpected happen. You generally want to keep three to six months’ worth of your total average monthly expenses saved.
You can’t stop surprises from happening, but planning ahead for a rainy day will hopefully allow you to keep surprises to just an annoyance, rather than a financial catastrophe. Many credit scores get hurt, not necessarily because people are irresponsible, but because they were simply not prepared enough for tough times.
Rule #6: If you have a credit account, use it; if you don’t, start borrowing money
Your credit score and report is like a resume. It’s a summary of your experience that shows you are qualified and trustworthy. If you don’t have a resume and proof of work experience, it makes it difficult for an employer to hire you, as they’re taking a risk if they do.
Not having to borrow money does not show lenders you are more financially responsible. Borrowing and showing you have experience paying back your loans, however, is a better indicator of you being a low risk factor and will build up your credit score. Therefore if you have credit, use it and keep building your experience. And if you don’t, start building credit.
Rule #7: Start building credit early
The longer you have a credit history, the better your credit score generally is, assuming you do everything else you need to do. After all, age of credit is one of the major factors. So if you can, start taking steps to establish credit under your name as soon as you get the opportunity to.
Rule #8: Consider starting with a student credit card
If you’re young and can be responsible with spending, an easy way to start building credit is to get a credit card. Student credit cards are good options as they’re catered to younger folks still in school. They often start with a low credit limit but many have some perks and rewards. Use it only once or twice or month for small purchases such as a tank of gas or a lunch. Then pay it off as soon as the bill comes.
Rule #9: Get a store retailer card
Retailer credit cards are also a good way to build credit as they’re easier to qualify for, even for those with no credit history. You’ll be limited to using the card at only that store, so pick a store that you may frequent often to maximize the points or rewards that the card may give you.
BUT, be sure not to spend too much either. Stick to your set budget.
Rule #10: Consider a secured credit card
Another way to establish credit or rebuild credit is to use a secured credit card. A secured credit card requires you to first make a cash security deposit. But unlike a prepaid card, you will have a line of credit. Overtime, your deposit may be returned to you as you prove you can use your card responsibly. Pick a secured credit card that reports your activity to the major credit bureaus so you can build your credit file.
Rule #11: Have a co-signer
If you cannot establish credit yourself, either because you have poor credit or because you have little credit history, see if you can have a co-signer who already has good, establish credit help you out. This may make it easier for you to be approved for credit and start fixing or building your own.
When someone co-signs a credit account with you, their credit score acts as leveraging factor, and the person acts as a back-up should you be unable to pay for your loans. The co-signer’s credit also becomes tied to the credit account, so be sure to not put them in a tough financial position. A co-signer can be anyone you trust, such as a parent, family member, or close friend.
Rule #12: Only co-sign for people you can trust
If you decide to co-sign for someone else, be sure the individual is responsible with their spending, as you are equally held liable for their payments should they either miss a payment or be unable to pay. Before you co-sign for someone, make sure you are able to afford their payments in case they are unable to. Otherwise, both your credit scores will take a hit.
Rule #13: Get installment loans
Installment loans are any type of borrowing where the money is repaid over time through a set number of scheduled payments, or installments. Normally, at least two payments are made towards the loan and the term of the loan may be as little as a few months or even decades. Personal loans, auto loans and mortgages are all examples of installment loans.
These types of loans are all common ways to build your credit.
Rule #14: Know the difference between a soft and hard credit check
Be sure to clarify if your credit score will be subject to a soft inquiry or hard inquiry before you submit your information for credit.
Soft credit checks are actually pretty common and occur when a person or company checks your credit report as part of a background check. These inquiries can be part of an employer background check, getting “pre-qualified” or “pre-approved” for credit, or even when you check your own credit score. A soft inquiry can occur without your permission, but these have no effect on your credit in any way.
Hard credit checks do affect your credit. These are commonly done when you finalize an application for a loan, credit card, or mortgage, and the lender needs to check your full credit report before making a lending decision. Hard inquiries typically lower your credit score a few points and may remain on your credit report for two years, though the damage usually decreases or disappears over time, even before the inquiry may fall off your report.
Comparing loan offers (with the exception of comparing auto loan and credit card offers) on LendingTree will only conduct a soft credit check until you finalize a loan with a lender.
Rule #15: When applying for credit, shop around within a two-week time period
Shopping around for credit is the smartest way to save money, especially on large purchases. Even a small interest rate difference is a large amount of money over time. But, be sure when you are shopping and applying for credit such as an auto loan, mortgage, or personal loan to do so within a two-week time frame. By doing this, each hard inquiry will actually be merged and only count as one.
Rule #16: Do NOT apply to too many credit cards at once
Credit cards, unlike installment loans, do count as an individual credit hit with each application. They are not protected by a shopping period and consolidated as one credit hit. Do not apply for multiple credit cards at once! Compare credit cards online first before deciding which one you should submit an application to.
Rule #17: Shop only one type of credit line at a time
Borrowing too much is an easy way to hurt your credit score and sends a red flag to lenders. Only apply for one type of loan at a time.
Rule #18: Have some time in between shopping periods
After you’ve shopped around for one type of loan or line of credit, wait for a while before getting another loan. Borrowing too much too fast is another red flag. Let your credit score recover a bit first.
Rule #19: Diversify
Consumers with a higher number of credit accounts and varying types generally have better credit scores, as they have been approved by more lenders. Applying for different types of loans, such as credit cards, auto loans, and a mortgage, over your lifetime will increase your credit score.
Rule #20: Know when to stop spending
Using credit cards are an easy way to help you build credit, IF they are used responsibly. If you are using a credit card, be sure to either keep track of your expenditures on your cards using receipts, or using an online service if your bank provides one. Make a habit to check your credit card balances at least once a week, not just when the bills come in. This should help you keep track of your spending, but also keep an eye out for fraud.
Rule #21: Keep your balances and utilization low
Utilization is the amount of credit you have used compared to the maximum amount of credit you have available. Keep this number low.
Rule #22: Split your utilization across multiple accounts
Even if your utilization is low relative to the total amount of credit you have available to you, if it’s heavy under one account, that may still hurt your score. Therefore, split your utilization across your different credit lines so they represent only a small amount of each individual credit accounts’ limit.
Rule #23: Try sticking to under 10 percent of your credit card’s limit
Consumers with the best credit scores have generally less than 10 percent utilization. Keep this as your ideal goal. For example, if your credit card’s limit is $5,000, don’t put more than $500 on that particular card. Once your reach $500, you should stop spending, start making purchases on a different card, or start paying cash.
Rule #24: Avoid using more than 30 percent of your credit card’s limit
Using anything more than 30 percent of a credit card’s limit is when your credit score may start taking a hit. As a best practice, make 30 percent utilization your absolute upper limit.
Rule #25: Make early payments
Your utilization is probably reported at the end of a cycle, around the same time as you would receive your bill. However, this may not always be the case. Some lenders may report your utilization in the middle of the month. It’s therefore still best to stick to the under 30 percent rule at any point. But, if you do happen to go over 30 percent on a credit card, you can make an early payment before the billing cycle.
Pay down to at least below 30 percent or even under 10 percent of your credit card max before your cycle ends. That way, the lower utilization number will be the one reported.
Rule #26: But don’t make payments too fast
Making early payments is a great way reduce your utilization. But don’t pay off your credit card completely or that will be reported as zero utilization, and therefore not likely to add to your credit score. Keep a little amount on the card so there’s utilization to report.
For installment loans, paying early is also a great way to save money on interest costs, but paying off loans too fast may also shorten the average age of your open accounts. If you decide to close or pay an account off early, make sure you have another open account keeping your average account age higher. Credit is essentially a balancing act between factors and can vary from each individual’s situation and personal portfolio.
Rule #27: Don’t close credit card accounts without first checking its impact
If you have an old credit card you no longer use, don’t immediately close it. Closing a credit card reduces the amount of credit available to you. This would therefore also increase your total utilization. Before closing the card, see how much these two factors would be impacted. If it’s significant, closing the card could lower your credit score.
Rule #28: Keep your oldest credit account open
Even if it isn’t being used, it’s probably best to keep your oldest credit card open. This card will act as a counterbalance to any new credit cards or credit accounts you open by keeping your average account age higher.
Rule #29: Open new credit only when you need it
Opening any new credit account will hit your credit score, though the impact will lessen over time. New accounts will also lower your age of credit. Only open a credit account when you need it and if it will help your credit score in the greater long run.
Rule #30: Open enough credit cards to match your spending habits
Credit cards are a great tool to help your cash flow and are more secure than debit cards. If utilization is a problem, which can be the case when spending habits change (such as when you get a raise), open an extra credit card to match your habits so your utilization is lowered. For example, if your budget allows you to spend $1,000 a month, but your credit card has a limit of $5,000, consider opening another credit card so you have more credit available. If the new credit card has a limit is $5,000, then that boosts your total available credit to $10,000 and drops your utilization to 10 percent from 20 percent without any difference to you.
The number of credit cards you have are not a heavily weighted factor toward your credit score. You may see a short-term hit on your credit for the card application, but because your utilization dropped and available credit increased, your credit score will go up higher in the future.
Rule #31: Ask for credit limit increases
You can also ask for a credit limit increase through your credit provider. If you’ve been a loyal customer and have a good credit record with them, they may provide you a higher cap which leads to a lift in your credit score. But, if you haven’t been good at managing your credit, this may actually backfire. The conversation may lead to a lender taking a closer look at your profile and actually lowering your credit limit if you haven’t been making proper payments!
Rule #32: Reduce your total debt
Having debt weighs down your credit score. As you pay off a loan and reduce the total account balance left on your debt, you’ll start seeing your credit score slowly climb up.
Rule #33: Don’t revolve your accounts
Revolving accounts, like credit cards, allow you to pay either some or all of the debt amount each month, instead of requiring a fixed set payment. Avoid revolving your accounts and instead just pay the full amount. This prevents you from being in debt and increasing your credit risk. The higher your credit risk, the lower you credit score. Not revolving your credit cards should be your goal so you don’t carry debt from month to month. Then, you can avoid credit card interest altogether!
Rule #34: Pay down revolving debt, such as credit cards, first
If you have debt, pay off your revolving debt, such as credit cards, first. Credit cards also happen to be unsecured loans, which means a lender cannot take something back if you stop making payments, unlike with secured loans such as an auto loan or mortgage. Excessive credit card debt, to lenders, is therefore a high indicator of risk.
Credit cards generally have higher interest rates than most other loan types, so it would be beneficial to pay down the most expensive debt first and leave more cash in your pocket. Paying down revolving debt is also the easiest action you can take to increase your credit score. You’ll see your credit score improve pretty quickly by simply paying credit cards off.
Rule #35: Make more than the minimum payment
Pay off as much you safely can when your payments come in. Paying only the minimum keeps you in debt longer, which will weigh down your credit score. The faster you can get rid of debt, the better your credit will be. Plus, the small the payment you make, the more interest you’re paying over time.
Rule #36: Pay all of your bills and utilities on time, every time
Unfortunately, contrary to common belief, your bills and utilities probably do not positively impact your credit score. That’s because utility companies likely don’t report payments to the three major credit bureaus. However, that doesn’t mean that they don’t or won’t! Pay your bills on time every time just in case, but also because it’s the right and sensible thing to do.
Rule #37: Pay your rent on time, every time
Like utility bills, rent is also unlikely to be reported to the credit bureaus by most apartment owners, landlords, or management companies. But again, that doesn’t mean that all of them don’t or won’t! Still pay on time because landlords and utility companies typically do send unpaid accounts to collections agencies, which do send reports to the bureaus.
Rule #38: Transfer balances
Transferring a balance or part of a balance to a new credit card is one way to reduce your utilization, assuming you don’t rack up more debt. You will see a temporary small drop to your score, so don’t do this if you’re looking to qualify for another loan right away and want your credit at its highest. But, any drop will be short-lived and will climb back up over time.
If you transfer a balance to an introductory 0% APR credit card, you may be able to save a lot of money as well. Just watch out for costly transfer balance fees that may eat up any savings.
Rule #39: Use a free service to constantly track your credit score
Keeping an eye on your credit score is the easiest and simplest way to stay on track of your efforts. Additionally, if you notice a drop in your credit when there shouldn’t be, it may be a sign of something wrong, such as identity theft. Use a free credit score service to also keep a pulse on your status.
LendingTree’s My LendingTree is one example of a free credit service that also provides insight on what factors are affecting your credit. It keeps track of all your loans and credit cards in one easy place.
Rule #40: Get a free credit report
You are can get a free full credit report from each of the three major reporting bureaus once each year. So split the year and get a report from one of the bureaus about once every four months. It’s a good idea to get a full report at least once a year to review, as a report gives you insight on otherwise unknown transactions and specific factors that may be affecting your credit score.
Rule #41: Dispute and fix credit report errors immediately
Credit reports can be wrong, as errors do happen! If you find something that is negatively affecting your credit score that shouldn’t, or happen to come across fraud, report it to the bureaus immediately and dispute it. You don’t want things that are not your fault weighing down your credit. Fixing an error could significantly increase your credit score.
Rule #42: Don’t wait to ask about payments
If you take out a loan, ask up front about payments and regarding timing. Know when will bills arrive and through what method. Then, confirm again with the lender before that time arrives to make sure you can make proper payments on time.
There are stories from people where they never knew when they needed to start making payments and the lender did not make an effort to contact those individuals regarding collections. Those individuals were not aware of missed payments until they saw a drop in their credit score. A lender should make an effort to contact you, but that may not always be the case. Be sure to protect yourself and reach out.
Rule #43: Pay off past due accounts
In newer FICO and VantageScore credit scoring models, paying off or settling debt in collections could increase your credit score, depending on what other information is on your credit report. Older models did not account for paying delinquent debt, only that the debt was delinquent in the first place.
Today, having no balance on your collections looks better on your credit report, so make it a priority to work with collectors instead of avoiding them. Settling a debt is cheaper than paying the debt, but will yield the same credit score result.
Rule #44: Ask for a good faith adjustment
This may not always work, but asking for a good faith adjustment, or sending a goodwill letter to a creditor that reported your late payment to remove a mark against you, may yield success and bump up your credit score. When asking for a good faith adjustment, you goal is to explain why you missed your payment and why the creditor should wipe it from the report. Be friendly and courteous, and ask the creditor to empathize with your situation. If you can, point to a specific situation that may have led to your missed payment, or show a recent track record of on-time payments. Keep it brief.
You might have to contact a creditor multiple times, and maybe through different methods such as email, phone calls, or letters, but persistence may give you results.
Rule #45: Be patient
Your credit score won’t jump overnight. It takes time to build and careful managing. If you follow all of these steps, you’ll be on the right track. Remember, age of credit is a factor, so control what you can control and let time do its thing!