Tips for Building a Strong Credit Score

Credit scores are three-digit numbers ranging from 300 to 850 that represent a consumer’s creditworthiness. Banks, credit unions and other institutions typically make lending decisions based on substantive data, which helps them assess or gauge the level of risk involved. Historical data shows that a consumer’s past credit behavior is a strong indicator of their future behavior; therefore, most lenders check credit scores.

People with past credit problems are most likely to explore the best ways to build credit. Similarly, some younger individuals or those who are just starting their careers might not have a credit score yet.

Having a damaged credit score can have a variety of negative consequences. For example, you might struggle to obtain approval when applying for a home mortgage loan or a car loan. In many cases, lenders may approve an applicant with poor credit; however, they may impose substantially higher interest rates.

In many U.S. states, your credit score will impact the rates you pay for car or homeowner’s insurance. Those with damaged credit might not qualify to lease an apartment, and some employers perform a credit check as part of their background screening process for prospective new hires.


Check your credit report for any errors

Individuals looking for answers regarding how to build credit should start by reviewing their current credit report. Consumers are eligible for a free copy of their credit report each year from the major credit reporting bureaus: Experian, Equifax and TransUnion.

In many cases, consumers who review the details of their credit history may identify errors or inaccuracies. This is a credit-building shortcut, as each credit bureau has relatively simple ways of disputing any erroneous information on its website. If any adverse credit report entries are corrected, it will generally increase credit scores.


Apply for a credit card

Credit cards are one of the more effective ways to build credit. Unlike car loans and other installment loans, credit card accounts are revolving credit accounts, meaning they have no fixed term or ending date.

To build credit using a credit card, use the card for minimal purchases and make all required payments before the due date. Many credit cards often offer cardholders a variety of benefits or rewards.

Keep in mind that any unpaid balance on your card account each month incurs interest charges; therefore, cardholders are encouraged to pay their current balance in full each month to avoid these extra charges.


Reduce your credit utilization rate

Many consumers looking for answers regarding how to build credit are unaware of the importance of their credit utilization ratio.

Credit utilization ratio applies primarily to credit card accounts or other revolving accounts where the consumer may make purchases up to some defined maximum amount or account limit.

This ratio is expressed as a percentage that equates to the amount of credit currently being used in relation to the maximum available amount of credit:

Credit Utilization Ratio (CUR) = Total current debt/total available credit

Consider the following example:

You have two credit card accounts with a $1,000 limit on each. You currently have balances of $500 on each card. You are currently utilizing $1,000 of your maximum $2,000 total credit limit; thus, you have a 50% utilization rate.

Maintaining a utilization ratio below 30% is a good rule of thumb.


Apply for a secured loan

A secured loan uses funds you deposit in a certificate or savings account as collateral. Other types of loans are secured by different forms of collateral. The borrower may typically use secured loan funds for most purposes, and they may help you build a positive credit history.

Secured loans are distinct from unsecured loans, which do not require collateral. Those with an average (or better) credit score are most likely to qualify for unsecured loans.


Apply for a credit builder loan

Credit builder loans are among the more recent, innovative ways to build credit. A credit builder loan is an installment loan with a fixed term. After obtaining loan approval, the loan funds are deposited into a certificate account, where they will remain for the duration of the loan.

Each month, you will make a payment toward the loan balance. After successfully making all necessary payments, you may access the account containing the loan funds. Throughout the term of the loan, the lender will report the account activity to the major credit bureaus, establishing a possible credit history.


Payment History

Individuals eager to establish their credit or improve their credit score should know that their payment history is the most significant factor for calculating their score. Consumers with excellent credit scores usually demonstrate a history of responsibly making timely payments over multiple years.


Type of Credit

Another tip for those interested in building credit involves having a credit “mix.” Your credit mix refers to having two or more types of credit accounts. For example, if your credit report contains only installment loan entries, such as car loans, consider establishing a revolving credit account by obtaining a credit card.

The tips above are just a few ways to increase credit scores, as various other credit-building strategies exist. For example, consider applying for a personal loan, which is typically used for purchasing a wide range of things.

Those with multiple existing credit accounts might benefit from a debt consolidation loan. Many people find that a debt consolidation loan helps simplify their finances by having only a single monthly payment to make. Ideally, you will want to merge or consolidate your higher-interest debts into a loan with a lower rate, allowing you to pay off the balance sooner.



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