Credit scores are to adulthood what SAT scores are to high school. You know a score close to 800 can dictate your future, but it’s a big source of stress in the meantime.
[A perfect credit score is 850 but that’s almost attainable. You should be fine above 750.]
Seriously though, a good credit score is key to the ability to take out credit cards, auto loans, and home mortgages, and lets you pay less interest on them to boot. But they’re a bit mistifying. Like, how are they calculated? And how do you get a good score?
While not the only ones, these are three of the main factors that impact your credit score:
- Paying your bills on time
That means paying the full amount due by the due date, not just the minimum payment. I accept I’m the kind of person who forgets anything not written or pinned down, so I avoid any issues by having automatic payments set up on all of my cards.
- The age of your credit cards
Here’s one of the few times older is better. Credit scores average the age of all of your credit cards and loans, and the older your credit’s average age is, the better. If you’ve had a card for a while, it’s probably worth keeping it open so long as it’s not charging fees.
- The percent of outstanding credit you use
Pretty much every card or loan has a max amount of money you can put on it – the credit limit. The less you use up of this limit, the better your credit score is. Let’s say you have two cards, each with a $1,000 limit. If you have $200 in charges on one card and $300 on the other, you’re using 25% of your total credit ($500/$2,000). Generally, you want this number to be below 33%.
If you want to improve this figure, many companies will let you request a higher credit limit after you’ve been paying your bills on time for a while. Just remember not to use the extra limit they give you.
Do you know what doesn’t help your credit score? Not having any credit cards. It’s a bit circular but you need credit to build credit. So if you can pay your bills on time, and don’t need to get an overspending habit under control, you really should consider taking out a credit card to build your credit.
[I’ll emphasize again since it’s so important – only charge to cards if you plan to pay your bill on time. Don’t charge anything you can’t afford. If this might be too tempting for you, skip the card.]
But I get that some people don’t love credit cards. The good news is, there is an easy, automatic way you can build credit on a card without thinking too much about it.
Credit cards don’t build credit unless you use them. But there’s no minimum on the amount you need to charge. So you could set up a small, monthly recurring payment on a card, like a Netflix account. Then, you set up an automatic payment on the card every month. That way you’re paying a small bill on time, automatically, while maintaining a good credit ratio. Both factors will improve your credit score.
This also works if you have a main card you use, but want to take out a second card to improve your ratio of credit used. Make sure you double check the bill gets paid every moth, but otherwise it’s an almost thoughtless credit score improvement.