There are some financial “entertainers” who believe that building credit and building your FICO credit score is unnecessary and a waste of time. There are some who believe you need to build your credit and continue improving your credit score.
I believe that you should keep an eye on your credit and build your credit so you get a 760 and above FICO credit score. Aiming for an 800+ FICO credit score is a fool’s errand in my opinion. I would love to see proof and data points that show getting an 800+ FICO credit score provides an incremental benefit compared to a FICO score between 760-799.
Here are 6 things to build your credit and improve your FICO credit score
1. Understand your finances and be honest with yourself
I think the biggest issue that people run into is running up credit and not being responsible or knowledgeable enough about one’s own finances. In order to build credit, you have to have credit. If you are trying to build credit and using your credit card but only paying off minimum monthly payments, that is a huge problem. Yes, your credit will slowly improve because you are paying on time, but you are also drowning yourself in debt without even realizing it until it is too late.
In my 20s, I ran into this same exact issue. I started to open up no annual fee credit cards that had decent rewards, but I would only pay minimum monthly payments and occasionally miss payments. I was not honest with myself and did not have the knowledge to be a responsible credit card user. My score eventually bottomed out (defaulting on my student loans did not help) because my climbing debt got so overwhelming that I thought I could just ignore my debt.
2. Getting a no annual fee rewards credit card is the quickest way to build credit
Please do not apply for a credit card until you have honestly evaluated yourself financially. Being a responsible credit card user means using your card monthly AND paying off your balance in full every month. If you cannot pay off your balance in full every month, then you need to pause because this means you cannot afford the purchase. which can easily be avoided. The monthly revolve on a credit card makes it very easy and quick to show creditors that you are a responsible person.
3. Pay on time every month
This is one of, if not, the most important factor to building your credit. The easiest way to avoid missing a payment is to automate your payment. Never missing a payment simply shows the lender that you are responsible with the credit given to you.
If you have a credit card, paying on time is a must, but you should also pay off your balance in full every month. Paying your credit card balance in full also helps you avoid unnecessary interest rate charges.
4. If you have a credit card, pay off your balance in full every month. Do not rollover your credit card balance
I mentioned this a few times already, but I cannot emphasize these points enough. I have experience working in the financial services industry and I can tell you that interest rate charges are one of the most profitable ways banks make money. There is a certain point of acceptable late payment behavior and beyond a certain point, late payments become a loss. If you are a credit card user, but only pay the minimum monthly payment, then the banks love you because of the interest rate charges that you are paying to the banks.
I am a firm believer that if you cannot afford to pay off your entire balance every month, then you cannot afford to buy. There is a difference between your active balance and your statement balance.
An active balance is your total balance. Your statement balance is the amount you need to pay off by your payment due date; otherwise, you will be charged interest.
5. Keep your utilization rate or debt to credit ratio low
This is a fancy way of saying do not max out your credit cards. I have heard and read that the ideal debt to credit ratio is 30%. Ever since my self-imposed personal financial crisis hit in my entire 20s, I have stuck with a 10% ratio. I came up with this 10% because based on my experience the 30% ratio made me think that I could afford things that I really could not afford. 10% seemed to keep my finances in check. Nowadays, it is never more than 1%. This is mainly because my credit line has skyrocketed compared to when I was experiencing credit line decreases and account closures in my 20s.
6. Keep your average account age in mind and do not close your oldest accounts
I do not necessarily believe that your average account age impacts your credit or your credit score all that much. Subjective sure. However, I believe that you should not close your oldest accounts. For example, if you went to college, you most likely opened a credit card. If you have been tempted to close it because you never use it or perhaps you do not even know where it is, just keep it open. Shred it if you have to.
For those of you who are savvy credit card users taking advantage of rewards programs such as Chase (where you can open a max of 5 cards within 24 months), have you seen a big drop off in your FICO credit score? Perhaps a temporary hit, but most likely not a significant drop.
