I have several major credit cards, two of which I use pretty much daily. But I also pay them off at the end of each month. This way, they report positive credit to the agencies and I get points for gift cards and other great things. Last year I bought most of my Christmas through the accumulation of these points.
(Hint: make sure you look for a credit card with no annual fee and high point returns. Low APRs are irrelevant if you plan on paying your balance off every month, however they could be beneficial were you to hit a financial crisis. Also, never opt in for the insurance; it's a waste of money).
Secondly, I have, through the years, taken out several small secured loans through my bank to help build my credit score. If you've never had a secured loan before, let me tell you a simple way to take advantage of this safe credit building option: You take out a loan for $5k (or so) from your bank and immediately deposit it into a savings account which is used as collateral against the loan and cannot be withdrawn. While you will have to pay interest on these loans, the interest rate will be very low, since the money is secured within the same institution, and if you deposit the $5k into a high interest yielding savings account, the interest you acquire can help offset the interest you pay on the loan. Once you have paid the loan off, you will have essentially saved $5k, so it's also a great way to save money. Make sure you take at least a year to pay these type of loans off for maximum positive impact on your credit, and make sure there is no fee for paying the loan off early before you sign the contract.
These methods are the only two I've used to establish positive credit. I've had people say that without a automobile or home loan you can't establish a credit-worthy score, and this is absolutely not true.
Other hints for improving credit scores:
- Pay your bills on time. Personal accountability and trustworthiness are critical to building a good credit score. After all, applying for credit is the modern day equivalent to the good ol' fashioned handshake and determining what your "word" is worth. If you haven't held to your word in the past, lending agencies aren't likely to much stock into it now.
- Do not exceed 30% of your credit available on any one credit card or your overall credit. You should always pay your credit cards off at the end of the month, but if you don't or have a large purchase on a credit card, ask for a balance increase to ensure you stay under the 30%.
- If you are in good standing with your credit card company, ask for a lower interest rate. It's so easy, yet most people never do it. I once helped a friend knock 3% off his APR by encouraging him to call. Again, this won't matter if you pay it off at month's end, but it's good to have in case of an emergency that prevents you from paying your balance off in full.
- Don't close accounts in good standing unless there is a reason to (fraudulent activity, annual fee, etc). These accounts still report to the agencies as "in good standing" and will help your score in enriching the length of your credit history.
- Try to utilize those older accounts at least a few times per year so the merchant doesn't cancel them and so they show recent activity.
- Apply for credit as little as possible. Once you get a few major credit cards under your belt, don't apply for any others. Yes, I know Target will save you 5% on your first purchase, but my Discover card gives me 5% cash back on certain purchases all year and it doesn't impact my credit score...plus I have an amazingly low APR.
- Start building credit early. You don't have to be 18 to begin building a credit history, so go head and set up something for your children so they won't be starting from scratch at 18+.
- Check your report regularly. Most of you probably know that you are entitled to check your credit report for free once per year. What you may not know is that you are actually entitled to check your report from each of the agencies (TransUnion, Experian, Equifax) once per year. Rather than check all three of mine at once, I generally check one in January, another in May and the third in September. If something unusual comes up, it's likely to hit all three agencies, so it doesn't matter which I'm checking AND I can catch any identity theft or fraudulent activity within months, rather than having to wait up to a full year.
- If you do find something inaccurate on your credit report, you are entitled under the Fair Credit Reporting Act to dispute it with the reporting agency. The agency is required to research your claim and provide a response within 30 days. Make sure you send your dispute via certified letter, so you have a date of receipt. If the reporting agency doesn't respond within 30 days, they are required to take the item in question off. If they do respond and disagree with your dispute, you can request verification of their findings, which they (once again) are required to submit to you within 30 days.
1. Longevity of credit history
2. Standing of accounts (whether or not you've paid on time, etc)
3. Credit to debt ratio
Working on these three things is the ONLY way to improve your scores.
Although you are able to look at each of your credit reports once per year, you will only be able to pull your score up through a paid service. Generally the credit bureaus will offer you a one-time look at your score through their sites (fees for this vary). I recommend myFico.com to retrieve your credit scores as other (independent sites) are not as reliable. I signed up for a free trial period of an offered product, captured my score, then cancelled the product, so it didn't cost me anything.
As a testament to the reliability of myFico.com, the score they gave me last week was exactly the same as the "qualification score" (average of the three scores) quoted by my (potential) mortgage company today.
Want to know what all that hard work and strategic borrowing will buy you?
A spot in the coveted "800 Club" with less than 6% of America, yours truly included.
I'll have a drink waiting for you.
