How to Establish Good Credit

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How to Establish Good Credit

Let’s discuss the mythical credit score… There are countless rumors floating around in the ether about credit scores, from ‘don’t check your score, it will negatively impact your credit,’ to ‘married couples have a joint credit score,’ to ‘the better your job, the better your score!’ While a sizable chunk of the information we read online or hear from our colleagues regarding credit scores can (and should) be disregarded, there is no denying that your credit score is an important number with serious implications.

To start with, let’s break down how credit scores are calculated. According to FICO, there are five key factors that are considered to determine a credit score.

  1. Payment history (35%): Have you paid off your credit card balances, and were the payments made on time?
  2. Amounts owed (30%):  Your credit utilization rate — what percentage of your credit limit are you using?
  3. Length of credit history (15%): How long have you had credit? This includes any and all lines of credit you have had over the course of your life.
  4. Credit mix (10%): Do you have a variety of credit products? This could include credit cards, mortgage loans, installment loans, finance company accounts, etc.
  5. New credit (10%): How often do you apply for new lines of credit or open new accounts?

Now that you’re familiar with the key factors that determine a credit score, we’ll walk through three steps you can take immediately to get your credit score on the right track — and bust some credit myths while we’re at it.

  1. Pay down your balance

Pay your credit card bill on time, and pay it in full. This may seem like a no-brainer, but seeing as 35% of your overall score is based on your payment history, we can’t stress enough how important it is. Did you know that not only do creditors look at how much you owe, but they also look at how much you owe in comparison to how much credit you have available? Try to keep this rate, known as your credit utilization rate, under 30%. That is to say, if your credit limit is $10,000, you should never have more than $3,000 charged at a time.

  1. Increase your credit limit

Piggy backing off of tip #1, the larger your credit limit, the easier it should be to keep your credit utilization rate below 30%. If you’re frequently charging over 30% of your limit to your credit card, consider asking for a credit increase. It’s critical to remember, though, just because you have a higher limit does not mean you should start spending more.

  1. Open a new account

Contrary to the belief of some, having multiple lines of credit can be a positive thing. For instance, if you wish to increase your credit limit, but your credit card issuer declines to grant additional credit, applying for a new card through a different issuer will still get you to that higher overall credit limit. As your utilization rate is based on all your open lines of credit and balances rather than on each individual credit card, you could still succeed in lowering your overall utilization rate. Do keep in mind though that if you plan to open additional lines of credit, they should be spaced out. Opening too many new accounts at once can negatively impact your score.

Remember, credit is a tool, and it’s meant to be used. Don’t be afraid of credit, be smart about it! If you’re displeased with your credit score, remember that there are ways to boost it, it just takes a little time, patience, strategy, and willpower. If you have questions about your credit rating, reach out to our team!