The American economy is built on credit. If you have a good credit rating, you can receive low-interest credit cards, mortgages, auto loans or leases, and a whole host of other benefits. Without good credit, loans may be difficult or impossible to obtain—or may be painfully expensive.
So how do you go about building a good credit score? Here are some simple guidelines:
- Have only three or four cards, at most. People with a lot of credit cards are often viewed as credit risks since there’s always the chance they can go on wild spending sprees. (And face it, the more cards you have, the more you’re likely to use them.) Restrict yourself to a single “general purpose” credit card like MasterCard or Visa, and then a few specialty cards (gasoline, favorite retail store, etc.) Why not just one card? Because credit rating companies like to see that you can responsibly handle a variety of accounts—just not too large a variety.
- Keep your “utilization” low. Credit rating companies like customers who have high credit limits—and then don’t use them. A good rule of thumb is to never use more than a third of the credit limit you’ve been provided on any particular card. In the credit industry, this is called “low utilization.”
- Always pay on time. Nothing will “ding” your credit score faster than a pattern of late or delinquent payments. Always pay your credit card bills on time—which means at least five days before the due date if you’re using traditional “snail mail.” In fact, to ensure payments are received and acknowledged, it’s always best to use an online payment method. (E-payments are now offered by virtually all major credit card companies.)
- Avoid asking for new cards or raising your credit limits. Any kind of activity in your name beyond standard purchases and payments is going to send up a “red flag” at the credit rating services. Only open a new account when absolutely necessary, such as when applying for an auto loan.
- Don’t close inactive accounts. As strange as it seems, if you have a credit card account you no longer use, it can actually hurt your credit score to close it. (As stated above, credit rating companies don’t like to see any kind of activity beyond purchases and payments.) An inactive account with a zero balance actually tells rating companies that you’re disciplined enough not to exploit all the credit you have, so it can pay to keep it on your record.
Above all, exercise common sense. Don’t use credit to buy things you can’t afford, and try to pay off purchases as quickly as possible. (Paying interest is the equivalent of throwing money away.)
Use credit responsibly and you’ll find it will not only be there when you need it, it will be a lot less expensive.
