Healthy Finance: How to Build Your Credit Score in 5 Easy Steps


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Building great credit is part of a healthy financial life. The higher your credit scores, the more you can save on various products and services, like credit cards, lines of credit, car loans, mortgages and insurance (in most states).

But even if you never borrow money, your credit affects other parts of your finances. For instance, having poor credit may cause you to get turned down by a prospective landlord. It could also increase the security deposits you must pay on utilities, such as power, cable and mobile devices.

Credit cards are a terrific financial tool because they give you many benefits, including building and maintaining excellent credit scores. But you might wonder how to use them correctly and how many are enough. This post will review five tips for using cards to build excellent credit scores.

1. Make timely credit card payments (even just the minimum)

Making timely payments on credit accounts is a critical factor for credit building. That’s because your payment history indicates your financial responsibility and ability to pay what you owe.

Having a credit card allows you to demonstrate your creditworthiness by making payments on time — even if you only pay the monthly minimum. If the card company receives your payment by the statement due date, you build a positive history on your credit reports.

However, I recommend paying more than your card’s minimum. Ideally, you should pay off your entire balance monthly to avoid accruing interest charges. If you carry a balance from month to month, use a low-interest credit card to reduce the financing charge.

2. Don’t rely on being an authorized user

Many people start using a credit card by becoming an authorized user on someone else’s account, such as a parent’s. That allows you to use their card without being legally responsible for the debt.

Some card companies report a card owner’s transactions to an authorized user’s credit report. That could be an excellent first step for establishing credit — if the card owner makes timely payments. Even so, some credit scoring models ignore data that doesn’t belong to a primary card owner.

Therefore, don’t assume that being an authorized user is a rock-solid approach to building credit. It’s best to get your own credit cards as soon as you earn income and get approved.

3. Never max out credit cards

A significant scoring factor is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your total available credit limits, known as your credit utilization ratio. It gets calculated per account and on your accounts’ aggregate total.

A low utilization ratio shows that you use credit responsibly by not maxing out accounts. A high ratio indicates that you use a lot of credit and could even be in danger of missing a payment soon. A good rule of thumb to improve your credit scores is to keep your utilization ratio below 20%.

For example, if you have a $1,000 card balance and a $5,000 credit limit, you have a 20% credit utilization ratio. The formula is $1,000 balance / $5,000 credit limit = 0.2 = 20%.

There’s a common misconception that maxing out a card if you pay it off each month is okay. While paying off your card is best to avoid interest charges, it doesn’t guarantee a low utilization ratio.

The date your credit card account balance gets reported to the nationwide credit agencies is typically different from your statement due date. If your outstanding balance happens to be high when it gets reported, you’ll have a high utilization ratio that drags down your credit scores.

4. Use multiple credit cards

If you need more available credit to cut your utilization ratio, some easy solutions exist. One is to get additional credit cards to spread charges across multiple accounts instead of consistently maxing out one. That reduces your credit utilization and boosts your credit.

For example, if you have two credit cards with $500 balances and 5,000 credit limits, you have a 10% credit utilization ratio. The formula is $1,000 balance / $10,000 credit limit = 0.1 = 10%. That’s half the ratio of my previous example for one card.

Another strategy to cut your utilization ratio is to request credit limit increases on one or more of your cards. Having the same amount of debt with more available credit instantly reduces your utilization and improves your credit.

5. Keep credit cards active

Credit card companies are in business to make a profit, and if you don’t use one for an extended period, they can close it or cut your credit limit. You may be okay with a canceled card if you haven’t been using it, but as I mentioned, a cut in your credit limit can hurt your credit scores.

No matter if you or a card company cancels one of your revolving credit accounts, your total available credit will shrink, spiking your utilization ratio. When your utilization goes up, your credit scores drop quickly.

Anytime your card balances become a higher percentage of your total available credit, you appear riskier to creditors, even if you aren’t. So, keep your cards open and active, especially if you’re considering a big purchase, such as getting a home mortgage in the next six months.

However, if you have a card that you don’t like, don’t be afraid to cancel it. Just replace it with another card, ideally before you cancel the first one. That allows you to swap out one credit limit for another and avoid a significant increase in your credit utilization ratio.

How many credit cards should you have?

Now that you understand how credit cards help you build credit, consider how many you need. The optimal number depends on various factors, such as how much you charge monthly, whether you use rewards and how responsible you are with credit.

As I mentioned, having more available credit on your revolving balances helps your credit. Therefore, if you continually bump up against a 20% utilization ratio, you likely need an additional card.

Also, consider how different credit cards help you achieve financial goals, such as saving money on everyday purchases. Many retailers, big box stores and brands have rewards credit cards that reward loyalty with discounts, promotions and additional services.

I recommend owning at least two cards to have a backup in case something goes wrong with one — and to have as many as you believe will benefit your financial life and are comfortable managing. If you handle them responsibly, there’s no limit to the number of cards you can or should have.

About the author

Laura Adams is a money expert and spokesperson for Finder. She’s one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future and making smart money decisions every day.

This article originally appeared on and was syndicated by

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