How to Gradually Build Your Credit Score
If you're newly enlisted or just starting out on your financial journey, you might not know much about building your credit score. Why does it even matter? Your credit score tells potential lenders how trustworthy you are with credit, and building it up and maintaining a high credit score is important. These days, high credit scores play an essential role in all parts of life: employers may check credit scores, landlords look favorably on those with high numbers, and there's even a dating service for those who want to date others with good scores.
Since credit scores can be confusing even for the savviest of personal finance practitioners, here are a few tips to help you raise your score, even if you're starting from scratch.
Understand Your Credit Score
To build up your credit score, you need to know what kind of factors it takes into account.
Your credit score is comprised of five different factors, each of which is weighted differently:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Type of credit used (10%)
- Amount of new credit opened (10%)
Don't Be Late
The number one thing you can do to improve your credit score is to never be late on a payment. Even if you're late by an hour, your creditors are unforgiving and your credit score will take a significant hit. As you can see above, your payment history is the single largest factor in your credit score.
To ensure you'll never be late, automate your payments through online banking. That way, you won't worry about a late payment and the subsequent drop in your credit score.
Student Loans Can Help
Student loans are often a burden that many people suffer with, but they can actually help with building your credit score. (Well, at least they are good for something.) This is particularly useful for those who are just beginning to build up their credit scores.
Student loans are installment loans, as opposed to revolving credit such as credit cards. Because they are seen as "good" debt, making regular payments on your student loans can help build your credit history, which counts for 15% of your credit score.
Utilize Your Credit Cards Responsibly
One factor that plays into your credit score is how much you utilize your credit cards. If you utilize 0-20% of your available credit, that's considered ideal. If you use 100%, the credit rating agencies see that as potentially risky and downgrade you accordingly.
So pay off those balances at the end of every month. If you can't quite do that, try to pay down more than the minimum payment. Not only is it good for your credit score, it's also good for your debt load. And if you can't pay your credit card at all, then get help from a financial counselor before it's too late.
Get a Secured Credit Card
If you've been denied a credit card because of a low credit score or because you lack a long credit history, you might try getting a secured credit card. Here's how they work: You put a certain amount up front in cash for your credit card, and that acts as your credit limit. For instance, let's say you put a deposit of $400 on your secured credit card. Now your credit limit is $400.
As with all credit cards, you'll need to make payments on time. Your payments do get reported to all three credit ratings agencies, and that's how you can build up a good credit history for lenders.
Members of the military are in luck. One of the most competitive secured credit cards out there is available only to the military: the USAA Secured Credit Card. It does have an annual fee of $35 (every secured credit card has an annual fee), but in return, you can get an APR from 9.9% - 19.9% depending on credit history.