Your credit score can affect everything from what kinds of cards you’re eligible for to whether or not you'll be granted a car or an apartment lease. Clearly, it's incredibly important — but according to a recent report, nearly half of adults surveyed had a major misconception when it came to building their credit score.
When credit education company Credit Card Insider spoke to 1,051 adults about their finances, 42% of people said that they believed using your debit card or selecting “credit” while using your debit card builds your credit history or score — but this isn't true. Debit cards don't have any impact on your credit score whatsoever, and as for whether you select “credit” or “debit” at checkout? All that does is determine how the merchant processes the card and what fees it pays.
“There are a lot of misconceptions regarding how to build credit,” says Ted Rossman, industry analyst for credit advisory site CreditCards.com. Because a debit card draws from a pool of money you already have, he explains, using it doesn't affect your credit score. Paying off your credit cards or loans on time, however, does. “In general, building credit means demonstrating that you can pay companies back after they’ve extended a loan or line of credit to you," says Rossman.
If you've long operated under the mistaken belief about how to build up your score, don't worry — there are plenty of ways you can still boost that number (which for most common credit score metrics is ideally above 700, with 800 as the true goal, according to credit reporting company Experian). Here, Rossman and other finance experts share the best and easiest tips for increasing your credit score.
1. Pay your bills on time
“There’s nothing really complicated about this one: Pay your bills on time, every time,” says Rossman. “A single 30-day late payment could trim 100 or more points off your score, especially if you had a good score prior to the late payment.”
Corbin Blackwell, financial planner at investing site Betterment, points out that setting up automatic payments is the easiest way to stay on top of your bills. “It takes little effort and will ensure your loan payments are always on time,” he explains.
If you'd prefer to see where your money's going each month, however, set a reminder on your phone to manually make the payments yourself.
2. Keep your credit card balance low
Even if you plan to pay off your credit card bills in full at the end of the month, maintaining a high balance can negatively impact your credit score, says Rossman.
“A key component [of your score] is your credit utilization ratio — basically a fancy way of saying credit you’re using divided by credit available to you," he explains. If you’ve charged $4,000 throughout the month and you have a $5,000 credit limit, for example, you'll be left with a 80% utilization ratio — and that's way higher than the ideal number, which is below 30%.
If you're worried about your ratio, "toss in an extra payment or two mid-month to bring the balance down before the statement even generates,” suggests Rossman, adding that "lowering your credit utilization ratio is one of the fastest ways to improve your credit score."
3. Check your credit report for mistakes
Some credit agencies will notify you if there is a change to your score, but you should still always request a copy of your credit report to read over yourself each year. According to the Federal Trade Commission, 20% of U.S. adults have mistakes on their credit reports, and some of those errors are serious enough to significantly impact their credit scores.
“If you see any incorrect information — like an account that doesn’t belong to you or a late payment that you believe was on time — file a dispute,” says Rossman. It’s important to catch any mistakes before you actually need to apply for credit, adds Blackwell, as disputes can take time to be settled.
4. Space out your credit applications
Diversifying your credit is cool, but don't apply for several credit cards or loans all at once — it can do more harm than good. “Hard inquiries — such as lenders pulling your credit reports in response to loan applications — trim a few points off your score, and applying for several different loans in quick succession looks risky,” explains Rossman.
That doesn't mean you can never apply for a new card or loan. "Smartly adding the right accounts can help you, particularly if you’re new to credit or rebuilding credit after a prior misstep," says Rossman. But when you do apply, he adds, make sure it's been at least six months since your last attempt.
5. Get added onto a trusted person's card
Another way to boost your credit is by having someone with a good score — who you trust, and who trusts you — add you as an authorized user on one of their cards. “Their positive payment history and low credit utilization will translate to you,” explains Rossman.
While the person can give you access to a physical credit card if they'd like, they can also choose to just add your name to their account so that you reap the benefits of their strong spending habits, but don't have the ability to spend yourself. This can be a good way to learn how to manage money responsibly without too much risk, notes Jill Gonzalez, analyst at credit report site WalletHub.
Just keep in mind that the card holder's bad spending will translate to your credit, too, so only select someone who pays their bills on time and keeps their debts low. Luckily, if the account turns out not to be helpful, you (as an authorized user) can simply request its removal from your credit report, adds Gonzalez.
6. Use a starter card
If you're just beginning to build up your credit, Blackwell suggests using a starter card, as it has no fee, a low spending limit, and is designed for people with bad or low credit, such as students.
If you only put a fraction of your total purchases on that card every month — perhaps your phone bill or another similarly steady payment — and then regularly pay off the balance on time, it will be great for your payment history and usage ratio, Blackwell says.
7. Consider a credit-builder loan
A credit-builder loan "is essentially a form of forced savings," explains Rossman. For this loan, you have to set aside some money to pay it off every month for up to a year; at the end of the time period, you get to keep the amount you put in, usually minus some relatively small fees.
And since these loans are offered by many credit unions such as Equifax and TransUnion, says Rossman, they can be simple ways to help build up your credit.
8. Get a secured card
If your credit is so bad that you can't get approved for a new card, or you’re just starting to build your credit up from scratch, you may want to look into getting a secured card. “With these, the cardholder puts down a deposit that serves as their credit line,” explains Rossman. After several months of positive payment history, users are able to get their deposits back and upgrade to traditional (unsecured) credit cards.
"There’s no risk to the issuer because of the deposit," says Rossman, while Gonzalez adds that with these kinds of cards, “approval is basically guaranteed, and overspending is impossible.”
Even if you do everything you can to boost your score, though, remember that good credit builds over time, so don't expect change overnight. But that doesn't mean you shouldn't put in all the effort you can. "The bottom line is, while staying on top of your credit score doesn’t cost anything or take up too much time, it can save you thousands of dollars in interest rates in the future," says Gonzalez.