Credit scoring is a complex process. There are different scores, different score ranges, different scoring models and different databases used to generate all those scores. This can lead to a lot of confusion. It doesn't help that you may receive conflicting information on your own score from different sources. The good news is that if you make the right moves, you should be able to make a positive impact on your score, no matter how or where it's being calculated.
On your action plan to build credit, here are three moves to avoid and three to embrace:
1. Don't Ignore the Rules of the Road
Dig into the details of how credit scoring works by visiting the credit education sections of the FICO and VantageScore websites. These two data analytics firms are behind the major credit-scoring models. There, you will find a plethora of articles, blogs and videos all focused on better equipping you to navigate the world of credit.
2. Do Use Credit
It's a bit of a paradox: To improve your credit score, you have to wade into the waters of debt. Notice, I didn't say you have to carry balances and pay a lot of interest. You just need to have credit accounts and use them. This typically starts with getting a credit card or a loan from an institution that will report it to the credit bureaus. For those just starting out, a secured card could be a good way to get in the game.
3. Don't Rack Up a Lot of Debt
There's a fine line between using and abusing. Restraint is a good thing. If you use too much of the credit extended to you at any point in time, you'll actually hurt your score rather than help it. So don't carry balances on credit cards or lines of credit, and if you're forced to, keep the balance as low as possible. Remember: The best credit utilization ratio (balance/limit) is zero. You must be in the game, but you don't need to be all-in.
4. Do Make Timely Payments
Your credit score is designed to inform potential lenders if you're worth the risk. Will you pay them back or just take the money and run? This makes it imperative to pay on time every time. No matter which scoring model is being used, this is critical. Set up automatic payments to stay on track.
5. Don't Let Errors Stand
Periodically reviewing your credit report to look for errors or missing information is an important part of your credit routine. A friend of mine was unable to close their home purchase for several months while they worked to remove some erroneous information from their credit report. Review your reports well in advance of any major purchase.
6. Do Be Patient
Credit history includes the word history for a reason. Potential lenders want to know that you'll be a good borrower in good times and bad. Building or rebuilding that image of reliability takes time. Who cares if you're a good borrower for a month? But a few years or a decade? That's a bigger deal.
These moves should have you heading in the right direction. Good luck!
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