Credit score

How to start your credit score

Natakorn Ruangrit/Getty Images/iStockphoto

Your credit score is linked to almost everything you do – buying a house, a car, applying for a job – it follows you everywhere. It can take years to get out of bad credit and get it to a level where you can comfortably start borrowing, but if you’re looking to boost your credit score fast, here are some tips.

See: It’s time to break up with your first credit card
Find: US credit card debt at lowest since 2000

Reduce your balances

The rule of thumb has always been to keep your balance owing below 30% of your credit limit. So a $1,000 limit shouldn’t have a bill over $300. The more you charge on your credit card, like the maximum for example, shows credit dependency – something credit rating agencies don’t like to see. It’s better to pretend to have a credit card “just in case” rather than relying on it for your daily commute.

This, of course, does not apply to people who religiously redeem their card at the end of each month. Many consumers now use their credit card exclusively for all purchases throughout the month and then pay it off in full at the end of the month. Credit card companies and rating agencies recognize these spending habits, so it usually doesn’t count against you. Paying off full balances each month actually shows that you are not dependent on the card, but rather using it as it should.

Credit card companies are betting that eventually there will be a mistake – one month you might not have enough money or be late and incur charges. If you fit the profile of a consumer who maxes out their card each month and pays it back, make sure you’re religious about payments. Chances are you’ve done it before and don’t need the advice in this article!

Overall, maintaining balances below 30% on your cards shows a low utilization rate that keeps your reliance on credit relatively low.

You may have seen advice to reduce your credit usage by getting another credit card or increasing your limit, but these steps may be counterintuitive. Both of these options run the risk of serious credit inquiries, which can negatively impact your score and do the opposite of what you’re trying to accomplish.

See: 90-second moves to boost your credit score by 200 points
Find: 10 credit rating myths you need to stop believing

Paying down your card with a personal loan might be a better option to quickly pay off debt and boost your score, but it also carries the risk of tough credit applications, which you’ll need to consider. If you think your score has enough room to go up with paying off the debt that would be more important than the credit check, it might be worth it.

For all of these options, you can request that they be done without a bad credit hit – but that’s never a guarantee.

Dispute inaccuracies

Checking your credit report for inaccurate information or inaccurate charges can help you a lot more than you think. There are very often errors in credit reports, especially for cards that may have been closed or refunded. Sometimes credit bureaus don’t correctly identify a card as “closed” after you’ve paid and closed it. Instead, it will show as “paid in full”, but will still show as an open line of credit on your report. This can possibly negatively affect your overall score if you have a lot of cards.

See: 10 small changes to stay on track with your savings goals
Find: What to do if you’ve used up your savings in the last year

In some cases, keeping a card open with a zero balance can actually help your score. This increases your overall limit and reduces your credit usage. But beware – if your salary is modest and you have credit cards with limits of, say, more than half your salary, that doesn’t necessarily paint a modest picture. It really depends on your personal payment history, how responsible you are with your card, and how long you’ve had them each. Two to three cards should be enough for most people to cover expenses and emergencies.

Different types of loans

For the right consumer, this is a good strategy. Having different types of loans, such as an installment loan, credit card, and mortgage, can show creditworthiness. Again, it depends on the whole picture. If you have a bunch of loans, high utilization, and late payments, loan confusion won’t do much to help you.

Reducing your usage and looking for inaccuracies is the fastest way to boost your credit score in the very short term, i.e. 1-3 months.

Overall, credit scores are a behavior over a period of time, but don’t worry – a lot of progress can be made in six months towards a credit score that needs to be fixed with discipline and managed expectations.

More from GOBankingRates

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private banking and investment research. Georgina has written for Investopedia and WallStreetMojo.