For someone who doesn’t work with credit bureaus every day, figuring out what causes your credit score to move up or down can be a lot like predicting the twist ending of an M. Night Shyamalan movie. Well, back when his movies were actually interesting.
Here are five quick ways to make sure your credit score goes up (and stays there). In full disclosure, there are some variations to these principles, but like Captain Barbosa says in Pirates of the Caribbean when he describes the Pirate Code, they’re “more what you’d call guidelines than actual rules.”
1. Pay your bills on time, always
Approximately 35 percent of your credit score is derived from your payment history. And these days, with many companies offering online (and sometimes automatic) forms of payment, it’s easier than ever to pay your bills in a timely fashion.
To be perfectly honest, credit bureaus don’t consider an account detrimentally late until it’s 30 days past the due date, but if you keep that up, you’ll eventually start to remind people of the 2008 film, How to Lose Friends & Alienate People. If you pay your bills on time, you’ll keep the credit bureaus as happy as the animated characters from Despicable Me 2 dancing to a Pharrell song. That’s the last movie reference, I promise.
2. Keep your credit card balances low compared to your total available limit
Ideally, the balance on your card (at any given time) shouldn’t exceed 30 percent of the card’s available limit. So, if you have a $10,000 limit on a particular credit card, it’s best not to exceed a balance of $3,000 on that card.
Why 30 percent? Well, there’s not an exact answer. Some suggest that—by keeping your balance under 30 percent—you show that you’re worthy of more credit, and you’re responsible with the way you spend your money.
3. Apply for store charge cards only when absolutely necessary
Many retailers these days offer their own in-store credit cards. They do this because it benefits them financially—both from a bottom-line and customer loyalty standpoint. But, the more store cards you have, the more it could potentially impact your credit score in an adverse way. So, be selective with the stores where you open a card.
4. Keep “aged” credit cards open and use them periodically
Just like wine, a credit card gets better with age. Well, not exactly, I suppose. But, the longer you’ve had a credit card, the better it looks in the eyes of the credit bureaus. So, if you have an old card that you carry around but seldom use, consider paying at least one monthly automated bill with it. Then, pay off the balance each month.
5. If you don’t have a credit card or an installment loan, consider getting one
Showing that you can make consistent monthly payments without being late (see #1) will definitely help your credit score. But, if you don’t have something to pay off, it’s hard to demonstrate your ability to pay consistently. So, if you need to build credit for a future major purchase because you don’t have much of a credit history, setting up a secured card or a secured loan can help you beef up your score.
When you secure a loan (or a card), you are pledging some type of collateral, thus reducing the risk for the bank (or card issuer).
For an installment loan, one way to build your credit is to borrow against a Certificate of Deposit (CD). You place $2,000 into a CD, and the bank cuts you a check for the same $2,000. You then pay that money back (plus interest) over the agreed upon term of the loan. The interest rate is typically much lower due to the diminished risk for the bank. At the end of the term, you get to keep your original $2,000 and you’ve built up your credit history along the way by making consistent monthly payments.
There are certainly other things that can impact your credit score, but generally speaking, if you follow these “guidelines,” you’ll be well on your way to a Disney happily-ever-after ending. Last movie reference, I promise.