A high credit score is like a homemade meal; it takes time, patience, and cannot be whipped up instantly. Let’s look at the recipe to build a great credit score from scratch:
First, you need to have the ingredient of credit. People who don’t have any credit are not showing the credit scoring model their financial management skills. A credit card, home loan, or car note is a main ingredient in the credit score recipe. Remember: you are not required to carry a credit card balance. Using a credit card will help build your credit even if you pay it in full every month.
Second, make sure you pay a lot of attention. Pay those credit obligations on time, because timely payment is the single most important aspect of building a good credit score. You can gain lots of points by having a good history of on time payment, and, conversely, you can spoil your credit score with just a few missed or late payment patterns.
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Third, keep those credit card balances low. Credit card balances are like salt, less is more. The credit scoring model looks at your credit card balance in relation to your credit limit (this is called a credit utilization ratio). The lower the ratio, the more positively it affects your credit score. Make sure to never charge over 30% of your total credit limit, because you don’t want to get penalized.
Fourth, keep those old credit cards open and use them every now and then. You will get points for a long, lengthy credit history.
Fifth, don’t add too many ingredients all at once. If you don’t have any credit and are just starting out, don’t open too many credit cards too fast. One line of credit every year or so will work out great.
Sixth, remember to have more than one ingredient, if possible. The scoring model likes to see that a person can manage a mix of credit. Having installment loans (mortgage or car) and revolving loans (credit cards) will give a boost to your score.
Seventh, keep an eye on it. Check your credit report at least once a year and examine it carefully. Make sure there aren’t any errors (such as creditors that you don’t recognize, late payments or collections reporting incorrectly, etc). This happens all the time, and the sooner you catch it, the better off you will be. Dispute any incorrect information to get it removed.
Attaining a great credit score takes a little time, self discipline, and attention. However, putting in the effort will assure that you can get the best deals on mortgage, auto, and credit card rates. Following the recipe we just laid out is a great start to help you cook up a great credit score!