Smart Credit Practices

Aside from removing errors, what else can I do to improve my credit score?

While removing inaccurate, unverifiable, or erroneous information from your consumer credit report might be one of fastest ways to increase your credit score, there are other strategies you can consider. Many people also choose to add “positive” credit to their file:

  • Always pay bills on time – The most significant factor in calculating your credit score is your payment history. That makes paying your account on time, one of the most important credit practices you can engage in. While you might be tempted to skip a payment or pay late in lieu of paying for something else, keep in mind the long-term effect this might have to your credit rating.

  • Secure Credit Cards – Consumers who have difficulties getting approved for traditional (unsecured) credit cards might want to consider applying for a secured credit card. With secured credit cards, you first make make a deposit, usually into a savings account in order to secure your line of credit. You will then be allowed to purchase goods and services up to the amount you have deposited. For example, if you deposit $500, you maximum credit limit will be $500.Keep in mind, that even though you have secured your line of credit with your deposit, you must still make timely monthly payments as if you had a traditional credit card. The repayment history on this secured credit card gets added to your credit report. Consumers who continue to make their payments on time and maintain their balance low will generally see positive increases in their credit score.Make sure the company providing the secured credit card reports to all three credit bureaus to maximize your efforts.

  • Installment loan – Having a “good” mixture of the various types of credit accounts is generally a good idea. If you mainly have revolving credit accounts (i.e., credit cards), obtaining a small installment loan might be a beneficial. Many credit unions can be more forgiving towards a consumer with bad or no credit history compared to a traditional lending institution.Let’s say you obtain a short-term loan (1-2 years) and you make sure to repay the loan on time and without incident. This loan amount and your successful repayment, will be reflected on your credit report.

  • Retail Charge Cards – These days many retail stores offer their own lines of credit to consumers. Generally speaking, retail stores can be more lenient on issuing store charge cards than financial institutions who issue general credit cards. Nonetheless, these retail stores will report your credit account and repayment history to the credit bureaus. As such, positive maintenance of a retail credit card will likely increase your overall credit score.

  • Low Account Balances – Generally speaking, maintaining low account balances is considered a good credit practice. There are a couple of reasons for this. First, maintaining a low balance generally means your monthly payment will be lower. Lower payments places less financial burden on you each month. Also, should you experience a life changing event (e.g., health issue, divorce, job loss) lower payments and balances could mean less of an impact to your finances.Also, a component of your credit score is the ratio between your debt owed and your total available credit. Which means if you reduce your account balance, your ratio will become more favorable, which in turn increases your overall credit score. Many financial experts believe that maintaining a balance less than 30% of your total available credit is an optimal sweet spot.

  • Become an Authorized User on a Credit Card – If you have a trusted friend or family member who has good credit, you can “borrow” their credit history by becoming an authorized user on their account. If they decide to add you as an authorized user, you should see their account, along with their positive credit history appear on your credit report. Keep in mind, just as you both share the positive rankings, you will also share the negative effects. If they miss a payment, or rack up huge debts, those actions will also appear on your report.

  • Eliminate “nuisance balances” – Many people have very small balances or charge very small amounts on multiple credit accounts. Eliminating these small balances can be beneficial for a couple of reasons. First, you might be charging an amount on one credit when you have another available card with a lower interest rate. Using the card with the lower rate will save you money.Secondly, one of the factors in calculating your credit score is how many open account have a balance on them. Managing your small charges on one card might allow you to keep the balance on another account low, or even at zero, which generally looks favorably on your credit report.

  • Leave “good” old debt on your report – Many people choose to have old accounts removed from their credit report as soon as they are finished making payments. This is not necessarily a good idea. One of the factors in calculating your credit score is the age of your accounts. So, having an old account that reflects a good lengthy payment history can boost your overall score.