If your credit isn’t too hot, take heart. You can build your credit rating whether you have bad credit or just haven’t used credit much in the past. Credit ratings are all about one thing: risk. Before someone lends you money, he wants to know how much risk is involved in giving it to you. The information on your credit report and your credit score is used to estimate how likely it is the lender will get his money back. The less risk you present, the better your credit rating.
Get copies of your credit report from each of the three major credit bureaus (Experian, TransUnion, and Equifax). The Federal Trade Commission says you are entitled to a free copy each year from each credit bureau under the Fair Credit Reporting Act. The credit bureaus can make mistakes or may be given incorrect information. Errors can seriously damage your credit rating. Either way, the FTC also says you have the right to dispute errors and have them corrected.
Pay your bills on time. Be especially careful not to let any bill run 30 days late. This is the single most important factor determining your credit rating.
Open or close credit accounts sparingly. Everyone needs to open or close accounts once in awhile, but do so sparingly.
Pay down your credit cards. Credit cards are unsecured debt, which means you haven’t put any property up as collateral for the money you borrowed using your cards. If you have a lot of credit card debt, lenders will realize that extending you still more credit is a risky proposition. That hurts your credit rating.
Reduce your overall debt so you can lower your overall monthly payments. This is a bit different than paying off credit cards. Lenders look closely at your monthly payments. If your monthly obligations are excessive compared to your income, lenders will be reluctant to extend more credit. Focus on paying off debts that require relatively large payments. For example, if you have a car loan with $400 payments, paying it off will substantially reduce your total monthly payments and help build your credit.
Be consistent. An important part of your credit rating is the length of time you have used credit responsibly. This one is really just common sense. If you demonstrate responsible financial behavior month after month, year after year, it’s a safe bet you will continue to do so.
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