Building a Credit Score

The best tip I have for people building their credit to be patient. Very understandably, a lot of people who have no or bad credit want to get great credit as soon as possible. While this is a great long term goal, rushing it may cause people to make bad short term decisions. They might cancel credit cards they were better off holding on to, take out loans they don’t need, or higher credit repair services that are mostly useless. Slow down, relax, and focus on the long term, big picture.

The best strategy for rebuilding credit is to appear creditworthy over the long term. This starts with understanding how a credit score is calculated. The most important attribute is a clean payment history. Try not to miss any payments. Saving a little each month to create a buffer can help (from a credit score perspective, missed payments are way worse than only paying the minimum – so if you have to choose, it is best to build up some emergency funds instead of rushing headfirst into paying off as much debt as possible each month).

Having trouble making payments and saving up a bit? The core problem might not be credit at all, but cash flow. One of the best ways to raise credit over the long term is to increase income and cut down on expenses. If you’re having trouble balancing a budget, speak to a financial advisor! The Financial Planning Association offers free financial advising certain times throughout the year at locations across the country. And some universities, like the University of Georgia, offer free advising through resources such as the Aspire Clinic (www.aspireclinic.org).

And, if you have any defaults in the last few years, go back and pay those off. You can see all of your missed and late payments on your credit report (download it free from annualcreditreport.com). Clean those missed payments up and your score will improve noticeably, quickly… and then gradually improve and improve again over time. If you need help with this process, speak with a credit counselor such as the ones at Green Path (www.greenpath.com). They specialize in helping clear up old debts and get out of budget-crippling loans.

After a good payment history, the next most important attribute is credit utilization. Lenders have a few ways of calculating this – in short, don’t borrow all that much relative to your net worth, income, or credit limit. Easier said than done, right? But if you take a long-term view, know that your credit will gradually rise as your debts are paid off, your income improves, you build savings, and your credit limits on your credit cards increase. Let’s focus on that credit limit idea. As your credit improves, your credit card companies will offer to increase your limit. Unless you have problems overspending, you should accept these invitations – they’re a painless way of increasing your credit score. Not getting those invitations? Reach out yourself! Some credit card companies will raise your limit if you ask, increasing your score in both the short and long term.

The next most important attribute is length of credit history. There really are no shortcuts here – the longer you have credit, the more credit you have. And time here is not measured in days, weeks, or months, but in years. Again, have patience! And because credit history is one of the main attributes, it’s important not to cancel old credit cards! Cancelling cards will both lower your credit limit and shorten your credit history – a double whammy that will lower your credit score. If you do have an old credit card you don’t even want to use again, cut it up and throw it away – but leave the account open. (I’ll note a big exception to this is cards with high annual fees – if you’re not using the card anymore, those annual fees are unlikely to pay for themselves. Cancel those cards while leaving the rest open and unused).

If you follow these tips, your score will improve. As you clear up some of the biggest offenders from your credit report, you will see a fairly big jump (+50 to 100 points) in a short period of time (less than 3 months). If you continue the process, your score will improve another 50 to 100 points over the following 6 to 9 months. The rate of improvement will slow after that, with only 50 to 100 point improvement after an additional 12 to 18 months or so. Unless you have many major dings on your credit report, you might expect your score to finally level out in the 700s after about 3 years. If you do have major dings, it might take as long as 10 years before they drop off. At that point, you should see a very rapid increase – if you have the patience!