Ways to Build a Stronger Credit Score
Constructing a better score today.
There comes a time when you might want to transition from renting an apartment to buying your first home. Where do you begin? Oftentimes, the first thing banks and real estate agents will consider is your credit score. Having a high credit score enables you to not only secure a loan but also obtain a lower interest rate on it, saving potentially thousands of dollars over time.
Here are five ways to protect and increase your credit score.
Always pay your bills on time. “Your payment history is one of the key components of your credit score,” says Shannon Chow of First Hawaiian Bank. On a credit score, mortgage credit history carries the most weight due to the size of the loan.
Pay down your existing debts and avoid carrying balances on your credit cards. “Your utilization rate (the percentage of your available credit that you use) is another key component of your credit score,” she adds. It is best to keep a low balance on your credit cards. For example, if your credit card limit is $1,000, it’s best to keep your credit card balance to $500
When it comes to paying off your credit cards, Chow recommends consolidating your credit card balances with a personal loan or home equity line of credit. “HELOCs and personal loans generally offer lower interest rates than credit cards and can help you save on interest charges as you pay down your debt,” she says. “Most important, set a budget and stick to it so that you don’t accumulate new debts after you pay off the old ones.”
Live within your means. Chow advises not to spend more than you can afford. “If you can use credit cards to pay for your expenses, make sure you pay off your balance in full each month,” she says. This also means limiting the number of charge cards and loans. Too many open credit cards with balances and/or large amounts of installment debt (such as auto loans) will reduce your credit score or limit any increases.
Limit the amount of credit inquiries made. Every time you apply for a loan, the bank or lender will complete a credit inquiry. Too many in a short period will negatively impact your credit score.
Avoid co-signing for loans. Doing so means that you take on added risk, which is not what lenders want to see if you wind up needing a loan of your own. Lenders look favorably on co-signers because the person who has applied for a loan does not qualify and needs additional support from a co-signer. But when you co-sign for a loan, you become equally responsible for the loan repayment and thus your credit score is affected.
It’s never too early to start improving your credit. “Your credit score is an important measure that lenders use to determine if you use credit responsibly,” says Chow. “Having a good credit
score makes you more likely to qualify for a mortgage. In a competitive housing market, potential homebuyers who are able to get prequalified for a mortgage are generally more attractive to sellers too.”