3 Tips to Build and Improve Your Credit Score

Key Takeaways
  • A credit score indicates your responsibility when borrowing money from a financial institution or other lenders.
  • Credit score requirements must be met before you can apply for loans or new lines of credit.
  • Keep reading to learn how a credit score is calculated, why credit score matters, and the benefits of having a good credit score.
Are you ready to make some real money moves?

Financial decisions like purchasing a cell phone or applying to rent an apartment or house will require you to have your credit score in good standing. If your credit score is low or you are considered a “credit ghost,” you may be denied access to getting your new cell phone or renting a house. A low credit score can also allow lenders to charge you a higher upfront cost or pay more money because you aren’t considered creditworthy.

 

If you want to gain a higher credit score, below are tips to build, improve and sustain a great credit score.


What is a Credit Score? 

 

A credit score indicates your responsibility when borrowing money from a financial institution or other lenders. Your credit score number will change depending on your financial responsibility with credit. Your credit score is crucial when applying for a loan or opening a new line of credit. The higher your credit score, the lower your interest rate will be on a loan.


Credit Score Ranges

 

Credit scores range from 300 to 850, and a higher score brings benefits. Lenders use brands or types of credit scores, such as FICO scores. FICO scores are used by major credit reporting agencies TransUnion Equifax and Experian. Five factors are considered to determine your credit score. 


Payment History

 

The payment history section of your credit score deals with determining how responsible you have been with previous lenders’ money. For example, paying off the outstanding balance on your credit card accounts on time and in full indicates that you are a reliable borrower, which can improve your score. 


However, if you fail to make payments on time, it can indicate that you are irresponsible, which will negatively impact your credit score. Payment history is the biggest factor in your credit score, accounting for 35% of the final value.


Amount of Money Owed


The second largest determinant in calculating your credit score is how much money you owe, which accounts for 30% of your credit score. Your outstanding amount owed is compared to your credit limit to determine a credit utilization ratio value. The credit utilization ratio is a value that determines how much of your credit limit is used. It is calculated by taking your current outstanding credit card balance and dividing it by your credit limit.

 

woman looking at bills

Image Credit: Pormezz / Shutterstock.com

 

If the credit utilization ratio is over 30%, it may raise concerns for loan officers as it could be an indicator of an overspender. The 30% is a common threshold used when lending institutions check your credit score, and if you are seen as an overspender, it could lead to higher interest rates. Therefore, when using your credit card, try to spend up to, but not past, 30% of the credit limit to ensure that your credit score does not decrease.


Credit History

 

The third factor which affects your credit score is your credit history. Typically, those with a more extended credit history will have a higher credit score when building credit. In addition, having a longer credit history is beneficial as it could lead to lower rates when applying for loans. 

 

credit history

Image Credit: StepanPopov / Shutterstock.com

 

Your credit history may be short if you recently received your first loan or credit card. Therefore if you wish to increase your credit score, continue paying your bills on time and keep your credit utilization rate below the 30% threshold as discussed above. In addition, by paying off expenses on time, you can solidify your reputation as a credible borrower, which can help you when trying to receive larger amounts of monetary assistance, such as a mortgage


Recommended Read: How to Protect Yourself Against Credit Card Fraud


However, suppose you wish to increase your credit history more quickly. In that case, you can have a trusted parent or guardian add you as an authorized user to a long-established credit line, such as a credit card that has been used for multiple years. 


The only downside to this method is that if your trusted parent or guardian does not have a high credit score, it could have negative consequences for you. In addition, as you are being viewed as an authorized user, if they fail to make any payments on time, it could also lower your credit score. As a result, only consider this option if your trusted parents or guardians have a good credit score.

 

Overall, credit history makes up 15% of your credit score. 

 

Different Types of Credit


The fourth factor which can influence your credit score is the credit mix. Credit mix refers to a person's different types of credit, such as credit cards, student loans, and a mortgage. As long as they are adequately managed, those with a larger variety of credit accounts will more likely positively impact your credit score. This section accounts for 10% of your credit score.

 

Applying for New Credit


The final factor that affects your credit score is the frequency with which you apply for credit. Applying for credit consists of a new credit application or receiving a loan, among other things. Although applying for new credit is fine, the problem occurs when it is done too frequently. If it is done rapidly, it could send alarms that you are not a reliable person and are using the new loans to pay off the old ones, which can create a vicious cycle of debt.

 

credit application

Image Credit: Kittisak Jirasittichai / Shutterstock.com

 

This section also accounts for 10% of your credit score.

 

How to Build and Improve Your Credit Score Quickly

 

Use Credit Cards Regularly and Responsibly

 

A credit card poses many financial benefits when used responsibly. For example, a credit card can help you to build a high credit score that looks great on your credit report. Also, you will have access to a revolving line of credit from the issuing financial institution. 

 

A revolving line of credit can also be used as a short-term financial safety net. For example, having a credit card can be a lifesaver if your car gets stuck on the side of the road and you need to pay for tow truck assistance.

 

However, if you use your credit card irresponsibly, you run the risk of long-term financial consequences. Your credit score is an important number that many lenders review before approving you for a loan. So, it’s important to use your credit card wisely.


Recommended Read: Americans Rely More on Credit Cards Due to Inflation

 

Pay Back the Money You Borrow

 

Many people can get carried away using a credit card and typically end up in debt when they don’t have the money to pay it back. Remember, when using a credit card, you still borrow money that must be paid back. As a credit card user, you must have a keen sense of financial awareness and only purchase items you can pay back immediately (or within the billing cycle). 

 

Recommended Read: Should I Consolidate My Credit Card Debt?

 

If you were to buy items that you cannot pay off right away, it might lead to high amounts of debt. Therefore, you may see your credit score dropping as it will solidify to the credit card company that you are not financially responsible.


Pay Credit Card Balances On Time

 

After purchasing an item with your credit card, it is important to pay it on time. Many people think that paying their bills before the payment due date can help boost their credit score after the statement closing date. 

 

couple looking at bills

Image Credit: fizkes / Shutterstock.com

 

However, paying off your credit card immediately will result in a boost in your credit score. In addition, this approach benefits you as it increases your credit score because you are proving to the credit card company that you are a responsible recipient who pays their bills early (or on time). 

 

All in all, credit cards can be used to your advantage if you know how to use them properly. They can help you build and improve your credit score, which can help you obtain a loan with a low-interest rate when the time comes. Your creditworthiness is a big part of your credit score and credit report. Lenders want to know that you are financially responsible and can pay off your debt. 

 

Benefits of Good Credit Score


Lower Loan Rates


When lending institutions look at loan applications, one of the main things they look for is the credit score. A person with a high credit score showcases historical credibility when paying the money back on time. Therefore, lending institutions will be more lenient with their loan rates to those with better credit. 

 

Consequently, those with good credit scores have to pay less money in interest over time until the principal amount has been paid off. Paying lower interest rates goes for any type of financial lending. 

 

When applying for credit cards, applicants who have a good payment history and a high credit score will receive a lower interest rate on their card in comparison to someone with a low credit score and a poor payment history. These lending institutions put higher interest rates on those with lower credit scores because they are taking on additional risk.

 

When a person has a high credit score, it is known that they will pay back their outstanding amount on time without any issue; however, the same cannot be said for someone with a mediocre credit score. Therefore, as there is a possibility that a person with a lower credit score is unable to pay back their balance on time, these institutions impose a higher interest rate to offset the higher risk taken on. 


This thought process is used for any type of credit, not only for credit cards but also for loans and mortgages. Therefore, to ensure that you do not have a high-interest rate when applying for loans, determine your credit score and see what steps you can take to make it better. 


Increased Higher Rate of Approval

 

Whenever a loan is given out, there is a chance the lending institution will not see that money again. Those with a good credit history will have a lower chance of defaulting on their loan, which is why a lending institution will most likely increase their rate of approval for those with a high credit score. Along with a faster-approved application, the applicant may also be eligible for a lower interest rate. 


The Money Wrap-Up


Credit scores are a valuable resource that can completely alter your financial position in the long term. Working on boosting your credit score with every chance you get is important. A low credit score can make your life difficult when applying for a mortgage or other loans. However, a credit score in good standing can help you make your life easier.

 

Main Image Credit: Dean Drobot / Shutterstock.com

Was this content helpful?
Comments (0)

Sign In to leave a comment.

Download the CapWay App

Access more features to your Money Account

  • Money Goals
  • Request Money
  • Categorize Spending
  • Money Talk

The CapWay, Inc Debit Visa Card is issued by Metropolitan Commercial Bank (Member FDIC) pursuant to a license from Visa U.S.A. Inc. “Metropolitan Commercial Bank” and “Metropolitan” are registered trademarks of Metropolitan Commercial Bank ©2014.

1. For Money Account holders with a negative balance, the CapWay debit card will go into freeze until funds are deposited to bring account back to current. See terms and conditions

2. Sending or receiving money from other CapWay account holders will be instant. Transfers from other accounts could take up to 48 hours, depending on the financial institution.

3. Early access to funds requires direct deposit. Early payment is not guaranteed and is dependent on the timing of payer's submission of deposits. We generally post such deposits on the day they are received which may be up to 2 days earlier than the payer's scheduled payment date.

4. Money Goals allows account holders to save money towards financial goals created within the CapWay platform. Funds can be transferred from your Money Account or saved through the rounding up of your transactions from purchases.

5. CapWay offers financial content through Learn Money free of charge, but may include advertisements through affiliates. Phunds, CapWay's literacy program and session, is paid content or co-branded content.

© 2019-2022 CapWay Inc. All Rights Reserved.