Why a Good Credit Score is Important: Building and Maintaining Good Credit

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Are you doing everything you can to work towards good credit?

Establishing and maintaining good credit habits is important for building your credit score. And knowing how to build credit may improve your chances of getting approved when you’re looking to borrow money. A good credit score may also lead lenders to offer you better rates and terms when you’re ready to get a mortgage, loan, credit line or credit card. In some cases, landlords will check your credit as part of a rental application, or employers may check it as part of a job application.

Use these five tips to help establish, build and maintain good credit.

#1. Get a Credit Card

For many people, establishing credit starts with a credit card application. You will complete an application that includes questions about who you are, where you live, what you do, and your ability to make payments on the card. You may prefer to get a co-signor to strengthen your application and increase your approval chances. A co-signor agrees to pay your credit card balance off if you fall into arrears, but can’t borrow money on the credit card account.

Some people choose to apply for a secured credit card, which requires borrowers to “secure” the card by placing a lump sum of money with the credit card issuer. If you don’t make your payments, the credit card company can then keep your lump sum deposit. However if you use your card and then make payments as agreed, you will have established your first credit records.

#2. Keep Balances Low Relative to Limits

To keep your credit score moving in an upward trend, keep an eye on how much you’re borrowing on credit cards and credit lines. These types of credit accounts are known as revolving credit. They let you borrow up to a set limit, pay off some (or all) of your balance, and then borrow back up to the limit as long as your account is in good standing. Your credit utilization, or the amount of money you’ve currently borrowed in relation to your limit, is a factor used by credit reporting agencies for the calculation of your credit score. 

#3. Make All Payments on Time and In Full

Once you’ve been approved for credit, don’t miss a payment. Consistently making the required payments in full by the due date shows lenders that you’re responsible when it comes to your finances. This helps your credit score.

Stay on top of monthly minimum payments by setting up an auto-payment from your bank account to your credit card, credit line, or other credit account. This way you know that at least the minimum payment will get paid each month. If you fall short or make your payments late, you could negatively impact your credit score.

#4. Get Another Credit Product of a Different Type

Carrying a variety of credit products also helps build your credit score. It shows your ability to responsibly handle borrowing and making payments for several accounts. Credit accounts may include:

  • Credit card
  • Line of credit
  • Automobile loan

However don’t apply for multiple credit cards all at once. This suggests that you’re in a tough financial situation and desperate to borrow money, or that you’re trying to “live beyond your means.” Both situations can flag you as a “credit seeker” and may have a negative impact on your credit score.

#5. Don’t Close Your Old Accounts!

Building good credit takes time, so the longer you’ve been responsible about managing your credit, the better it is for your credit score. That’s why you should think twice before closing your old accounts – even if you don’t use them much. Closing them may also negatively impact your credit utilization ratio because you’ll have access to less credit.

Get on the right financial track by establishing good credit habits early in life. Make credit choices carefully, make your payments on time and in full, and don’t take on more debt than you can afford. Your reward will be quicker approvals, better terms and lower interest rates on your future borrowing needs.