Your credit score is important. That’s because most lenders use your credit score to gauge how likely you are to pay them back. The healthier (read: higher) your score, the easier time you’ll have qualifying for better rates and terms on personal loans, mortgages, car loans, and other financing.
Healthy doesn’t necessarily mean perfect. A FICO score in the “good” to “great” range — 680 to 850 — should help you gain access to some sort of financing. If you’re new to credit or repairing your score after years of mistakes, getting from a score in the 500s or lower to “great” may seem like a daunting task, but it’s possible — with time — if you follow the following six steps.
1. Beef up your credit history
You may have a low score because you simply don’t have much credit in your name. If you are starting from scratch, you will need to get a line of credit. You can start with the following options.
A secured card
A secured card is like a credit card with training wheels. The card helps you prove your responsibility and reliability to lenders without the lender taking on much risk. With the secured card, you’ll pay a deposit to the lender, and they will give you a line of credit that’s usually equal to your deposit, although it could be higher depending on your creditworthiness. The card will then operate like a regular credit card.
After a period of making on-time payments on the card — usually around 18 months — your score should have improved.
We continuously update our list of best secured cards currently out on the market. You can use this tool to compare secured credit cards to find the best one for your needs.
The store card
If you have a low credit score, you might get approved for a store credit card, as companies are more forgiving of people with low scores. So long as you are only using these cards as a credit-building tool — that is, charging small amounts and paying your bill in full each month — they can help improve your score. Just don’t carry a balance. Retail cards have incredibly high interest rates.
2. Keep your utilization rate low
Your utilization rate is the total amount of credit you’ve used up, divided by the total amount of credit you have available. Ideally, you should never be using more than 30% of your total available credit limit across all of your credit cards.
For example, if you have three credit cards with a total credit limit of $5,000, you shouldn’t carry a balance of more than $1,500 across all those cards at once.
Utilization makes up about 30% of your credit score, so it’s a big deal if you max out your card or carry a high balance month to month. Just remember: the lower your utilization rate, the better your credit score.
3. Pay in full, and on time, each month
The best way to demonstrate your responsibility to a lender is to pay their money back, in full and on time. At 35%, your payment history is the single largest factor in your credit score.
Pay your entire credit card bill each month in full. Try your best not to charge an amount to your card that you are unable to pay off on time and in full each month.
Avoid only paying the minimum amount due. Many borrowers are tempted to only pay the suggested minimum payment, but that only benefits the lender because they can continue to charge you compounded interest on the balance you carry each month. In the end, you’ll pay much more than you borrowed from them over a longer period of time. Also, paying the minimum each month doesn’t help grow your credit score.
4. Avoid credit card debt (like the plague)
Try to avoid getting into debt. This is easier said than done, but if you only buy what you can pay off in full each month, you can do it.
You might already be in credit card debt from misusing credit cards in the past. If you are, you should keep paying at least the minimum due on time each month and more if you are able. If you have a substantial, high-interest debt on your hands, you might benefit from taking out a personal loan to pay off the credit card debt.
Personal loans usually have lower interest rates than credit cards do, so although you’ll still have debt, you won’t be accruing as much interest on it each month. Many loan companies offer personal loan rates between 5.99% and 29.99%, and many will approve those with credit scores as low as 550. Shopping around for a personal loan won’t hurt your score since lenders use a soft pull to determine your eligibility.
Once your cards are paid off, set a small, recurring payment and try not to use them. You can stash them somewhere accessible and safe in case you do need to use them in an emergency, but leave the cards out of your wallet. Some go as far as freezing the credit card in a bag of water so they will be forced to break the ice to spend the funds.
5. Monitor Your Score Over Time
Once you have a higher score, you should do your best to protect it. You should keep up the good habits that got you to your high score: make on-time payments in full and keep your utilization low. You can even monitor your score’s progress through a host of online resources and phone applications like Credit Karma or Mint.com. Beyond continued monitoring, remember to check your credit reports at least once a year for accuracy and signs of fraud — you’re entitled to one free report per year from each of the three credit bureaus. You can get a copy of each through freeannualcreditreport.com.
Other Ways to Build Your Credit Score
Try a credit-builder loan
A credit-builder loan is similar to a secured credit card, but it requires no down payment. These loans are typically only offered by community banks and credit unions. When you are approved, the bank will deposit your loan in a savings account for you. You can’t access it until you’ve paid the loan back, however.
Build credit with rent payment
Paying your rent on time can help you build your credit score if it’s reported to the bureaus. Ask your property management company or landlord if they report rental payment data to Equifax, Experian, or TransUnion credit bureaus.
If they don’t, you can ask them to either start reporting or you can sign up for a rent payment service like PayLease or RentTrack that will let you pay for your rent online and give you the option to report your payments to the bureaus. The rent payment information will be included on your standard credit report and can help you build a score without a credit card.
Magnify Money is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.