I recall warnings of how credit cards are dangerous, and people end up in mountains of debt once they get hooked on credit cards. I was always told about the importance of a good credit score, but not how to achieve it. If a good credit score improved my financial future, how was I supposed to make it higher, if credit cards were scary? Plagued and paralyzed by these warnings, I had little guidance and didn’t understand how credit scores and credit cards worked.
I’m so grateful for friends, from stronger financial backgrounds, who shared how powerful credit scores and cards can be when used correctly, intentionally, and carefully. They demystified how credit cards could make my money work for me-- they weren’t scary, if used wisely.
Later, I experienced the tangible benefits of building my credit score, when I finally bought my first car, under my own name. Developing good financial habits helped increase my financial well-being, which immensely improved my overall well-being, as the voice nagging me about finances diminished. I was able to achieve a good credit score by prioritizing my actions to build a stronger financial future for myself and my family. Here are some tips for improving your credit score:
Here are some tips for improving your credit score:
Pay your bills on time (utility bills, student loans, car loans, credit cards, etc.).
When I moved into my first apartment, with a roommate, I chose to put the utility bills in my name, which improved my score. This came with risks, and the reliability of your roommate is crucial if you are going to do this, but paying these bills on time can help build your credit score early on. Paying student loans, car loans, and credit card bills on time is also going to improve your score.
Don’t rush to close out your oldest credit account.
Consider the age of the credit account before closing accounts. Student loans are reported to the credit bureaus just like any other type of credit. However, unlike credit cards which can remain open with a zero balance because they offer revolving credit, student loans are considered closed accounts once paid in full. Closed accounts can decrease your credit score if they are your oldest account.
One tip would be to pay down your credit card to a low or zero balance and keep the account open. For student loans, be aware that once those loans are paid off your credit score might drop a little based on how long you had the account(s) open. The length of credit history makes up 15% of your credit score but paying your accounts on time makes up 35% of your score – so it’s always best to continue to make your payments on time on all your accounts as you work to pay off loans.
Get your first credit card earlier rather than later.
Look for beginner-friendly credit cards by checking approval rates, typical credit scores of those approved, minimal annual fees, and if possible, 0% interest rates or low annual percentage rates (APR). Many companies offer a “soft” credit inquiry, which won’t impact your score, as opposed to a “hard” credit inquiry. Explore benefits that match your lifestyle, like cash back for dining or travel points. I enjoyed “earning” money by making usual purchases through my credit card’s cash back and point system.
Maintain less than 1/3 of your credit limit usage and pay off your credit card each month.
The amount of credit you use each month affects your score. Ideally, if you can completely pay off your credit card each month, this will help maximize your credit score. I limit my credit card use to the money I currently have, so that I can pay my balance off each month. However, if you must use your credit, like some students between loan disbursements, strive to keep usage below 10% for minimal score impact, or at most, 30% of your credit limit.
Over time, request an increase in your credit limit.
As you establish your credit score and history, and your income increases, request a credit limit increase from your card company. This helps improve your credit score by increasing your available credit which reduces your credit utilization ratio.
Overall, credit scores help illustrate to creditors our potential reliability as a borrower for future purchases. As I try to build a better future for myself, improving my credit score will enable me to qualify for the most optimal loans for future large purchases such as cars, homes, etc. In turn, it also helps improve my overall well-being by allowing me to finally put that little distressing voice in the back of my head to rest, to reach financial independence, and to build a stronger financial foundation for myself and my family.
Author Bio: Ingrid Channa is a second-year medical student at UC Riverside, School of Medicine. She aims to utilize her lived and professional experiences to help address social determinants of health, health disparities, and systemic factors that affect patients, their families, and surrounding communities.