Most people know that a low credit score can have massive negative ramifications on their lives.
From hiked up interest rates, to mortgage rejections – bad credit can make all of your financial dreams seem completely out of reach.
What if we told you that having NO credit, is almost as bad as having bad credit?
Unfortunately, it’s true. Without an extensive (positive) credit history, your credit profile will appear untrustworthy to lenders; stopping you from getting approved for loans, mortgages, and even a new car.
Building up your credit is different from repairing it. We’ve written extensively on the difference, here.
When it comes to building up your credit profile, you should be focusing on the following:
- Building up history, with well aged accounts
- Increasing your max limits
- Diversifying your lines of credit
- Perfecting your payment history, and keeping your utilization low
- Avoiding inquiries
Build up your credit history, with well aged accounts
Your creditworthiness is determined by your credit history.
To have credit history, you need Primary Accounts (accounts of which you are the owner). These include mortgages, loans of all kinds, and credit cards.
These accounts only really make your credit profile strong when they’re well aged, and show a positive payment history.
There’s no use in opening up a bunch of accounts, and expecting them to immediately improve your credit. Also, there’s no point in opening these accounts if you won’t use them, or alternatively, use them too much without making payments.
Why does a well aged, positive credit history matter?
Because creditors, and lenders, alike, judge your financial responsibility by how much credit you can responsibly use, and for how long. Your credit history is the best judgment of your personal ability to use, and pay back credit.
It pays to not only have accounts, but to keep them open for as long as possible. An account that is closed will no longer have a positive effect on your credit.
Increase your credit limits to build, and boost your credit
Something else that may seem counter-intuitive when you take financial responsibility at face value, is this:
It pays to increase the credit limits on your accounts where possible.
For example, when you’ve had a credit card for a while, it’s worth contacting your bank to get an increase on its max limit.
Why does this help build credit?
When you have high credit limits, yet positive payment history, it shows creditors – and lenders – that you can handle large sums of credit responsibly.
Having higher limits on your accounts also means it’ll become easier to get higher limits on other lines of credit you apply for. A banker is more likely to approve you for a $10,000 limit credit card if they can see you’ve handled similar credit limits in the past, and without payment issues.
Another reason high limits on your accounts help your credit is that you have more available credit to your name. The more available credit you have, the more you can spend before your utilization ratio gets too high. More on that below.
Increase the diversity of your accounts to show creditors you’re trustworthy
When it comes to Primary Accounts and building your credit profile, another aspect that matters to creditors is the diversity of your accounts.
There are many types of accounts you might have, such as a mortgage, a car loan, a student loan, credit cards, etc. Having a healthy variety of accounts shows creditors that you have a wide array of healthy spending habits, and are able to handle many forms of credit without late payments.
Payment matters. So does spending.
A big part of building perfect credit is keeping a stellar payment history.
Any collections, debts, and lates on your report will inevitably drag your score down, and despite how varied or aged your accounts may be, your credit will suffer.
Perhaps more important than any of the above factors – in terms of having perfect credit – is keeping your accounts paid on time.
We always recommend you automate your payments, so that you don’t hurt your credit due to late payments that were absolutely avoidable.
Another aspect of spending credit that you should consider is:
Making sure your Credit Utilization Ratio remains below 30% at all times.
As mentioned above, having multiple lines of credit, with high limits, can help you keep your Credit Utilization Ratio down. But from the get go, you should be aiming to spend less than 30% of all your available credit, at any given time. If you spend more than that, your credit score will suffer.
Avoid too many hard inquiries, they can kill your good credit.
Lastly, to build, and maintain perfect credit, you will want to avoid hard inquiries.
“What are inquiries?” You might be asking.
We’ve covered what inquiries are in this article, here.
In a nutshell:
Every time you shop around for a loan, or apply for credit, inquiries are lodged on your report. These inquiries, especially when they stack up during a short window of time, appear as red flags for lenders, and creditors.
A general rule of thumb is that you don’t want more than 6 hard inquiries lodged on your report within a 30 day period. It simply makes it look like you’re desperate for finances, which shows creditors that you are financially unstable. Many inquiries can also make it look like you’re having a hard time getting approved; meaning other lenders will wonder why you’re considered a risk.
Building perfect credit, is about building perfect credit history.
Consider your credit history as a background report of how financially sound you are. The more you have to show on your report, the more a creditor can judge you. And the more that you keep a positive history, the more a creditor will judge you for the better.
Building credit is about building up a positive credit history, with lots of high limit accounts, that are always paid on time.
When you build, and maintain perfect credit, all of your financial goals will become much easier to achieve.
Ready to build up your credit? Consult with our credit strategists, for free.