We’ve gone over credit a lot on this site, but for good reason…it’s very important to your future, whether you are buying a house, getting a loan for college or just signing up for a credit card your credit score matters a great deal and can save you a lot of money down the line. So how do you establish good credit exactly?
First, pay all of your bills on time. This is the simplest, easiest and most logical thing you can do to help improve your credit score. Lenders give you credit because they believe you are willing to live up to your end of the deal, and that is exactly what you need to do if you care about your score. Simply by making your payments on time, every time you can pretty much guarantee yourself a good credit score.
Next, pay down your credit balances. Ok, I admit this one is a tough one for many people… after all, people aren’t carrying huge credit card balances because they like receiving a statement in the mail right? Paying bills is hard to do because cash flow is always at a premium and with the market in the toilet and unemployment rates climbing it’s getting worse. Despite all of that you need to pay off your bills, and…this is important… stop using your credit cards all together.
I know some of you can only afford to make the minimum payments, and it will take a while to pay off your debt, but I can guarantee that if you keep using your credit cards I can guarantee that you will never EVER pay them off because the amount you pay off will just get replaced with new debt. Set a budget, evaluate your finances and figure out ways to free up extra cash to get the bills paid down. Dave Ramsey calls this the “debt snowball”… by paying off bills you free up cash to pay off more bills, and so on until you are completely out of debt. Not easy to do but definitely an important step.
Next, don’t close old credit cards. I know some of you are screaming “but you just told us to stop using credit cards!” Ok, you’re right I did, but notice I didn’t say USE old credit cards, I just said keep them open. Why? Because the length of your credit history is a factor in your credit score and by keeping old accounts open you show that you are responsible with your credit. Now if you cant handle having an account open without maxing it out then cancel it (it’s for your own good!) but if you can be responsible keep it open.
Lastly, don’t open new credit cards on a whim, because they offered you a prize or because it gave you a discount. A lot of stores offer a 10% discount on your purchases if you open up their credit card… isn’t that nice? How much is 10% of $80? $8! Is it worth ruining your credit score for $8? Even if you spent $500 is it worth ruining your credit score for $50? It shouldn’t be! Believe me with some of the interest rates they charge on those store brand cards, you’ll lose $50 faster than you could swipe them!