Your credit score is a key indicator of your financial health. But many young people don’t know their credit score. Those who know their score may be surprised to learn that it’s not as high as they thought. No matter which camp you’re on, building your credit is important and possible.
Your credit score plays an important role in your ability to obtain financing to buy a home, invest in real estate or buy a new car. Taking care of your credit score today can help you take care of yourself financially tomorrow.
Fortunately, improving credit is not particularly difficult. We have three simple tips (plus a bonus) that can help you build your credit score.
These tips are brought to you by Cleoa credit building app designed to help you build your credit without getting into deep debt.
If you’re looking for an easy way to build your credit history,
Check out Cleo here to get started >>
What is a credit score?
A credit score is a numerical representation of your creditworthiness according to the banks. Most people talk about their credit score as if there is only one credit score. In reality, there are hundreds of different credit scores that are all measured slightly differently. Although you have hundreds of credit scores, all credit scores tend to move in the same direction. When one score is good, another credit score is likely to be good.
Credit scores are all based on information collected by three major credit reporting agencies, Experian, EquifaxAnd Trans Union. You are entitled to a free annual credit report from all three agencies, so be sure to ask for this if you are unsure of your credit status. You can also use various apps and tools (including our sponsor Cleo) to check your credit score for free.
Once you know where your credit score is today, it’s time to start boosting your score with these simple tips.
1. Make payments on time each month
Your payment history is by far the most important part of your credit score. Each time you make a payment on time, your credit score increases a little. When you pay late, your credit score takes a hit. If you can only do one thing to increase your credit, pay all your credit accounts on time each month.
Many people start building credit by opening a credit card. If you have trouble with credit cards or don’t seem to qualify for a credit card, consider getting started with an alternative credit-building tool like Cleo.
The Credit Builder Card* is a secure credit card with a limit based on the security deposit you put in (minimum deposit $1). Cleo recommends using the card for day-to-day expenses or, even better, recurring bills. At the end of the month, you can either automatically pay off the balance or use your security deposit. Cleo reports payments on time to all three major credit bureaus.
2. Keep your credit utilization low
Even if you have a modest salary, credit card companies may issue you a card with a large credit limit. Unexpectedly, credit card companies issue large credit limits, so you can prove you don’t need that much credit. Banks love to see unused credits.
If you have a credit card with a credit limit of $2,000, you’ll never want to spend more than $600 on the card in a month. Even if you can afford to pay $1,200 in credit card expenses each month, banks want to see your credit utilization below 30% at all times. It’s even better if you can keep your credit usage below 10% of your total credit limit.
It’s quite common to max out credit cards when you start using them. You can reduce your credit card usage by pay off your credit cards. If you are working to pay off your existing debt, Cleo can help you continue to build your credit without having to open new credit cards.
The Credit Builder Card* limit is based on the amount you pay for your security deposit (minimum deposit $1). If you can spare $200, your credit limit will be $200 to start with. But Cleo does good for her clients. It does not report available credit to the credit bureaus. It will flag overdue payments, but it doesn’t say your credit limit is $200.
The relatively small amounts due on Cleo just show that you can use credit effectively and build your credit.
3. Give your score time
One of the biggest credit mistakes young people make is trying to rush to perfection. It takes time to establish an excellent credit rating. Attempting to open tons of credit products to increase your available credit will temporarily affect your credit score.
These short-term reductions in your credit score won’t be a big deal when your credit score is in the 800s. But when you’re building or rebuilding your credit, your credit score may not be able to absorb the flick of a credit inquiry.
It’s also common to make payments on time for two or three months and see little improvement in your credit score. These glacial changes cause many people to throw in the towel too soon. When it comes to your credit score, everything is fixable, even if you’ve filed for bankruptcy or have a delinquent credit card.
The trick is to stick with what works for as long as it takes to see your credit score improve. Most people who make payments on time for a year or more will see their credit scores improve significantly. And a great credit score opens up a world of possibilities.
Once your credit score improves, you may be able to use rewards credit cards, take out a mortgage to buy a house, or rent an apartment on your own.
Bonus tip: you don’t have to pay interest to build credit
One of the worst credit myths is that you have to pay interest to build your credit. You don’t. If you use a credit card, you can pay off the card in full each month. The credit card company will still report your monthly balance and your credit will grow even if you never pay a penny in interest.
When you know you don’t have to pay interest, you can avoid finding yourself deep in high interest credit card debt. Use credit cards, but don’t let credit card companies use you as a source of profit.
You can also use an alternative credit creation tool like the Credit builder card*. This secured card* establishes a credit limit based on the security deposit you provide (minimum deposit of $1). At the end of each month, you can either pay off your balance automatically or use your security deposit to pay off the card. This makes it very difficult to miss a payment or go into debt. Even better, Cleo never charges interest to its customers.
Start building your credit today
Building credit isn’t difficult, but it does take some time, the right tools, and a touch of self-discipline. Although it takes a year or two to achieve a good or excellent credit rating, you can start building that rating today. Make sure you’re using the right tools, making payments on time each month, and limiting the use of your credit cards. With persistent effort, you can build excellent credit without paying interest.
Ready to start? Check out Cleo here and start building your credit today >>
*The Credit Builder card is issued by WebBank, Member FDIC pursuant to a license from Visa USA Inc. Access to the card is subject to approval.