Anyone whose tried to get a loan with a weak credit history knows that even an excellent credit score will only get you so far with lenders. That myth your uncle told you about signing up for a credit card, using it once, paying it off and letting your credit history soar is just that – a myth.
Credit history is essential to building your credit and, consequently, your credit score. When it comes to credit, the word “history” is a bit of a misnomer; Unless you’ve got a suped-up DeLorean built for time travel, you really can’t “accelerate history.”
However, in the credit world you really can accelerate your history. There are a few simple things you can do to help build your credit history faster while improving your credit score, even if you’ve only got a couple years of credit under your belt.
1.) Apply for a credit card: One of the easiest things you can do to build your credit is get a credit card. Even if you already have a credit card in your wallet, opening up a second credit card will help build your credit quickly since it’s reporting to the three major credit bureaus – Experian, Equifax and Transunion – that yet another lender is willing to issue you a line of credit. Plus, this will lower your credit utilization (the ratio of your credit debt to your available credit line), which should always remain under 30%. (More on this shortly.)
Before you apply for a credit card, there are of course some things to consider:
a.) Match up your spending habits and credit history with the best credit card for you. Every time you apply for a credit score an inquiry into your credit is pulled, which can have a negative effect on your score. Once you find a card you like that you’re confident you’ll be approved of, that’s when you click the “apply” button.
b.) Along those same lines, too many credit cards can harm your credit score, and closing your credit card account also has a negative effect on your credit. Again, this is why it’s important to choose the right credit card for you.
c.) Make sure to apply for a credit card with a 0% intro period that covers purchases if you have no debt, and purchases plus balance transfers if you do have credit debt. We’ll explain shortly.
Once you have your new credit card…
2.) Use your credit card actively and responsibly: We touched on this earlier, but it only does you so much good to have a credit card; you actually have to use it, too.
Of course, we’re not telling you to go to the mall and spend your little heart away. But maybe designate a couple of small expenses each month to use your credit card with – gas or groceries, for example – and stick to the same budget you had before, only now you’ll charge them to your credit card instead.
Yes, it’s a bit of a lifestyle change and takes some will power to get used to, but the active credit user also has the more established credit history. Just make sure to pay it back in full each month.
3.) Lower your debt-to-credit ratio: This is something else we touched on earlier, but it’s worth revisiting.
Ideally, you want the amount of credit debt you have to equal less than 30% of your total credit line. So if you have a $1,000 credit line, you want to make sure the amount that you owe is less than $300 each month.
Opening up a second credit card helps, but what you really want to do is cut your current credit card’s debt ratio to less than 30%. This is easier said than done if you’re facing high interest fees. (And since you have little credit history already, then you probably are.) That’s where a balance transfer comes in…
4.) Transfer your balance to cut interest costs: The best way to get out of debt – or at the very least to lower your credit utilization ratio below 30% – is to transfer your current credit card balance to your new credit card.
Many credit cards offer 0% interest on balance transfers, so you can take one debt that you’re paying sky-high interest rates on (and likely getting nowhere when it comes to paying back said balance) and move it to a new account in which you pay nothing on interest for anywhere from 6 to 18 months.
If you pay off your credit debt within the promotional period, odds are you’ll enjoy a nice boost in your credit score in a relatively short amount of time. Just remember to make sure that the amount of debt you transfer to your new balance transfer credit card is less than 30% of the total credit line. Again, if your new credit card has a $1,000 balance, don’t transfer more than $300 in debt to that credit card.
5.) Get a copy of your credit report and dispute any errors immediately: This last one is a biggie. Even if you have a limited credit history, there could still be some errors on your report. One of the best ways to boost a credit score is to get rid of any false discrepancies.
Credit reports can be purchased on a one-time basis, plus there’s monthly credit monitoring packages that allow you to watch your credit score move. If you find any errors or false statements, you’ll then want to issue a dispute letter, and as a result of the CARD Act of 2009 credit card companies are required to respond to your dispute within 30 days.
So, if you find an issue in your credit report and successfully dispute it, you can receive a significant bump in your credit score in just a few months. (Despite new regulation, this is still rare but it does happen.)
Even if you don’t find an issue, at the very least you’ve become more familiar with your credit report and what effect your credit history has had to this point on your score. And understanding your credit report, while not a credit score accelerator short term, can have a long term effect on how you use credit moving forward.
This guest post was written by Jason Bushey. Jason runs the day to day operations at Creditnet.com.