Thursday, December 2, 2021
Cash FlowHow to Build Credit the Right Way

How to Build Credit the Right Way

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Credit, when used correctly, can be a crucial part of managing your money and achieving your personal financial goals. However, mismanaging credit is the surest way to turn your financial dreams into your worst debt nightmares.

Here are five tips for building, rebuilding, and managing credit wisely.

Get Current With Your Payments

Before you do anything else to rebuild credit, make sure every account you have is current (not behind on payments). Accounts more than 30 days past due can do serious damage to your credit, and the later they get, the worse the damage will get. Plus, outstanding balances can mean late fees and interest fees get piled on top of your balances. The longer you’re behind, the more expensive it’ll be to catch up.

If you’re struggling to get current on your cards, make sure to contact your issuer. In most cases, your credit card issuer will work with you to establish a payment plan. After all, it’s in the issuer’s best interests for you to repay that debt.

Pay Down Any High Balances

One of the key factors used in credit scoring is called your credit utilization ratio. This is the ratio of how much credit card debt you have (amounts owed) vs. your total available credit. For example, a credit card with a balance of $500 and a credit limit of $1,000 has a utilization ratio of: $500 / $1,000 = 0.5 = 50%. High utilization (being close to your credit limits) is a warning sign to creditors that you may have taken on too much debt. As a result, high utilization can hurt your credit score. One way to rebuild credit is to pay down those balances. The general rule of thumb is to keep your utilization below 30%. Below 10% is ideal.

Always Pay On Time

Every time you make a credit card payment and the issuer reports your payment to the credit bureaus. You are contributing to your payment history. Your payment history is the most important part of your credit score. No plan to rebuild credit will work if you aren’t paying on time. Make at least your minimum required payment by the due date every single month.

 Make Use of Auto Payments

If you’re having trouble remembering due dates, you can let the credit card company take care of it for you. Most banks and issuers will allow you to set up automatic payments. You can choose the amount you want to pay — make sure it’s at least your minimum payment — as well as when you want the payments to process.

Try to Keep Balances as Low as Possible

As mentioned, your utilization rate has a lot of influence on your credit score. Once you’ve paid down your outstanding balances, make sure to keep them low. You’ll struggle to rebuild credit if you keep running up your credit card balances after paying them down. People with excellent credit tend to have utilization rates below 10%.

You can use these strategies to raise your credit score, but understand they will take time. If you have very high utilization — you’re close to your credit limits — paying down your balances could provide the largest and quickest credit score boost. Credit scores damaged by credit report errors can also jump quite a bit when those errors are removed. Every credit profile is unique. As a result, the best strategy for rebuilding credit will depend on your credit history and the reasons for your credit problems.

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