What’s the best way to build credit? Over the years I’ve learned some really important lessons for building a high credit score with an overall strong credit rating and profile.
The secret to building and keeping a high credit score is done by forming good habits when it comes to managing your credit and overall finances.
Quick Note: A lot of people think that just using credit cards (or loans) and paying them off every month is all that is required for having and building good credit. The truth is this! It’s a good start, but there is much more you need to know about in order to keep a good credit rating and score once you get it! We’ll discuss what you need to know in the below lessons.
In this guide, you’ll learn how to increase your credit score by being fiscally responsible by doing the following:
- Limiting your credit applications
- Building a strong credit age and payment history
- Keeping a low credit utilization
- Using auto-payments to help make on-time payments
- How to fight the credit card companies by filing disputes etc., when errors appear on your credit report. The dispute process keeps the credit bureaus in check.
Maintaining a strong a strong payment history is mandatory no matter what! Building up a strong payment history is the fastest way to build up your credit without hiring any professional legal help. More on this later.
It’s also a good idea to speak with friends and share knowledge with them. They might know something you don’t and vice versa. That’s how I learned a lot about building credit back when I was younger.
Read the below lessons carefully and take notes if you need too.
Lesson #1: Limit Your Applications, Choose Wisely
Every time you apply for new credit you get a small ding on your credit score, whether or not you get approved. This is because of a hard inquiry, so open your credit accounts wisely.
What’s the difference between a hard and soft inquiry? Check out this article from Credit Karma for an answer: Hard and Soft Inquiries
Department stores are always pushing you to sign up for a new department store credit card to save 10% on a first purchase. It’s best to skip this kind of sign-up offer, especially if you’re just doing it for the discount.
Also, when you’re shopping for a big ticket item and need a new loan, be wary of getting too many pre-approvals. They sound harmless but will generate a hard inquiry and also ding your credit.
Consider the following scenario
You’ll be out shopping for a new car, and you’ll want to test drive that car. Some dealers won’t let you test drive the car unless they pull your credit and pre-approve you first. Never let them do this! What if you’re out test driving several kinds of cars? I’d just walk off the car lot and go somewhere else to buy that new car. Sometimes your best bet is getting a pre-approval ahead of time from a credit union. Then you can say “That’s OK, I’m already pre-approved from my credit union, here’s a pre-approval letter.”
The only exception might be if you’re going to test drive a high-end luxury car, pulling credit is almost mandatory for that.
A hard inquiry can stay on your credit report for up to 180 days. However, your actual credit score should start improving over a short amount of time.
Best case scenario for mortgage pre-approvals
Sometimes, a unique situation may require you to get more than one pre-approval when shopping around for credit. Such as when you’re doing a refinance on your home, and you need to find the best rate. If you must do this, do it in a short period of time (within 30 days), the inquiries will look better to an underwriter. The same rule applies when purchasing a new home too.
BTW, It always looks best if the hard inquiries are all for the same type of loan too!
Lesson #2: Building A Strong Credit Age And Payment History
The basic building blocks of creating a high and stable credit score are showing a history of reliable on-time payments to your creditors. The more time you can demonstrate this (credit history), the better it looks to lenders and the credit bureaus.
This is the most common way of how you improve and raise your credit score!
Generally, two or more years of recent on-time payments will look the best.
Also, try not to close out good standing credit accounts that show a long payment history. This can drop your credit score.
This lesson is a big one. I had to write an entire guide discussing how to open credit accounts for building up a strong payment history, take a look at it here: Killer Options To Rebuild Your Bad Credit [Or Establish New Credit!]
Lesson #3: Low Credit Card/Revolving Line Of Credit Utilization Ratio
Try not to exceed 30% of your total available credit line amount on your credit cards or other revolving lines of credit. For example, if the credit line is 1,000 dollars, don’t ever use more than 300 dollars of it. Above 30%, and your credit score could go lower.
Be especially careful with large balance transfers, which can really max out a credit line fast!
The lenders hate it when you pay off your credit card balance every month; I do it anyways. I’ve seen credit scores bump up much faster as a result because it keeps the utilization ratio at almost 0%. Plus making the minimum monthly payments will cost you a lot in interest payments!
Lesson #4: Consider Auto-Pay On All Of Your Credit Accounts!
Setting up auto-pay will force you to make on-time and consistent payments to all of your credit accounts. Just make sure you maintain a sufficient cash balance in your checking account to cover the estimated amount of monthly payments that will go out. It’s also not a bad idea to set up overdraft protection on your checking account, just in case!
Minimum Payments Warning
The auto-pay amount set up for your credit card and revolving line of credit accounts will most likely just cover the minimum payment that is due. So remember to make the extra payments manually to pay the down principal balance when needed. REMEMBER! You want to keep that credit utilization below 30%.
Quick Tip: I like to carry a max of two credit cards with me at a time. This little trick prevents you from overspending and will make it much easier to track and send payments out. In fact, to make your life simple, you may only want to consider just having a max of 2-3 credit card accounts, period!
Lesson #5: Dispute All Erroneous Negative Items On Your File
This lesson is pretty straightforward. If you have any errors on your credit report, it will bring your score down and make it hard to qualify for any new loans or credit accounts to help build up your credit.
So get into the habit of disputing these errors the moment you see them on your credit report.
Late payments are the most common type of errors that are reported and can really bring your score down and scare creditors away from approving you on any new future credit.
If you’re currently having issues with late payments, I highly recommend you review my guide on Credit Report Late Payment Removal
Did you know that approximately 1 in 3 American adults doesn’t check their credit report regularly for errors? It’s a staggering thought right?
Then people wonder why in the heck they’re not getting approved for new credit accounts to buy a new home or car.
On top of that, the Federal Trade Commission (aka, FTC) even admits in a report that one in five consumers admitted getting an error fixed. Check out the FTC and the article here: FTC Study Credit Report Accuracy
Here’s A Quick Overview Of How To Dispute Credit Report Errors
Get a copy of all of your credit reports
Check out annualcreditreport.com to pull your free credit reports.
Start reviewing the report, like any important document you’ll read over. This one is all about you, make sure it’s accurate.
There are all types of errors you can look for such as:
- Late Payments that are over seven years old.
- Credit accounts that don’t belong to you.
- Account’s you’re not a co-signer on.
- An account that is closed directly by you, but it shows the provider closed it.
- You decided to pay off a debt belonging to a collections company, and they still show it as unpaid.
- What about a 7-year tax lien that is still showing up?
- Or charged off accounts from a bankruptcy that are still showing up.
- Other errors can be your personal information is incorrect. Such as your home address, employment records, income, etc.
The list goes on and on!
Where to start for getting a dispute filed to report errors.
The entire dispute can take 30-60 days typically. You can dispute with the credit bureaus directly or with the furnisher (the company or lender who is not reporting accurately.)
Here’s a list of links for filing disputes directly with each credit bureau.
When filing a dispute, you’ll typically provide the following information:
- Your Name, Address, and Phone number.
- Clearly identify the mistake and an account number. You’ll also include a confirmation number if one is available.
- Statement of why you’re disputing the information reported.
- Provide a copy or show documentation such as your credit report or other documents showing the highlighted item that you are disputing.
It’s highly recommended that you let a professional service do this for you if you can afford it. Just like when it comes to removing late payments, you really want to get this right the first time. The second time around you’ll be in a much lesser advantage because you’ve provided a lot of information to the bureaus and furnisher’s head of time.
Maintaining and building a good credit profile and score is not really hard to do if you follow the lessons we discussed in this article. Be proactive, responsible, and monitor your credit report for errors. In the end, you’ll be just fine!
Thanks again for reading another one of my blog posts, until next time.