Six Proven Methods of How to Build Credit and Improve Your Credit Score

Six Proven Methods of How to Build Credit and Improve Your Credit Score

When it comes to how to build credit, it's hard to know which ways work and which ways aren't effective. The credit bureaus are always changing the way they formulate credit scores, and nobody really knows the exact formula that FICO uses to apply a credit score to a persons file. We do however have enough information that FICO has released that lets us put together, very accurately, proven strategies to start increasing your credit score.

Depending on your current situation (if you're starting with a clean slate or have had some credit related blemishes in the past) the time it will take for your credit score to increase will vary some. It's obviously going to be much easier and quicker to build credit if there is no harmful credit marks in the past, but if there are that just means that it may take a little while longer to improve your credit score.

The proven strategies on how to build credit:

1. How to Build Credit Tip 1: Get a Secured Credit Card: It may be hard to get an unsecured credit card when you have bad credit or no credit, so you may need to get a secured credit card. These are great because they'll report to all three of the credit bureaus, and if managed right (keeping the balances low and payments on time) you're credit score will raise over time and create enough of a credit file to be able to get a more traditional unsecured credit card. There is a very slim chance of being turned down for a secured credit card because they will require you to give a deposit up front to secure your credit line. Ideally you'll be able to convert these to an unsecured credit card after 12-18 months of a good payment history.

2. How to Build Credit Tip 2: Get a CoSigner for a Loan: Another great way of building credit is to get someone close to you to cosign for a loan. Getting a cosigner is when someone that has an established and good credit history puts his/her name on the dotted line next to you to secure a loan. The terms are the same as they would be if the person cosigning was getting the loan in their name, which can be very favorable. As long as the payments are kept on time and made in a favorable manner, this is a great way to build credit. One word of caution though is if you're to default on this loan, the cosigner will also have the negative marks placed on their credit file.

3. How to Build Credit Tip 3: Check Your Credit Reports: This may or may not be obvious, but it's important that you know where you're starting from. Is your credit score in the high 500's or is it in the 600's? Knowing your where you're starting at makes it much easier to determine the path that needs to be taken when considering how to build credit lines.

4. How to Build Credit Tip 4: Open a Bank Account: This is often overlooked because bank accounts don't report to the credit bureaus, but if you start establishing a good track record of keeping your bank account in good shape then you may qualify for good interest rates with your bank for loans and credit cards. It's much easier for a bank to approve you for a loan when they have a history of how you take care of your obligations. If they see that there are no overdrafts and money is being managed properly a bank may have the ability to overlook some past credit problems or lack of credit history and grant you access to loans that will help you build credit.

5. How to Build Credit Tip 5: Understanding How Credit Scores are Made: Understanding how a credit score is formulated will help you make good decisions when it comes to building credit. As you start establishing new credit accounts, the balances that you carry on your credit cards can impact your credit score upwards of 100 points either way. This means that if you have a history of keeping your balances low, as you build credit, you'll be rewarded with a better credit score than someone that carries a balance at the limit each month.

6. How to Build Credit Tip 6: Keep Your Credit Card Accounts Open: The only thing that closing credit card accounts will do is lower your credit score. As you're building credit make sure you don't ever close one of these accounts unless you absolutely need to. Even if you never use the accounts, closing them will only decrease your credit ratio, and decreases your average length of credit history on your accounts. Just know that the longer an account is open and in favorable terms, the better it is for your credit score. It's best to use your credit card accounts fairly often, but make sure to keep the balances low.(this goes into understanding how scores are made)

Well there you have it. If you follow these methods on how to build credit, you'll be well on your way to getting yourself in a position of having a great credit score and being able to qualify for any type of loan you could possibly ever want.

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