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- Building up a strong credit score is key if you want to benefit from great credit cards offering a ton of points and miles.
- You can build one fairly quickly through things you're already doing, like paying off your credit card and opening new credit lines, like an auto loan or mortgage. That's because you need to use credit to build credit.
- No one is saying you should go buy a car to build credit. But if you were already planning on a new car (or a new house) rest assured that as long as you're making your payments on time and in full, your new loan should help build your credit and increase your score.
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Looking to earn a bunch of miles and points, but don't have a lot of credit? You'll need to build a good credit history to get the best cards. These cards are typically only available to people with good to excellent credit.
Surprisingly, some of the most financially responsible people have limited credit because they simply don't use any. To banks, this is almost as much risk as if you never borrowed money.
Here are some of the most effective ways to increase your credit score that you might be doing already.
1. Keeping your oldest accounts open
One of the most important components of your credit score is the average age of your accounts. Even if your older credit cards aren't all that great from a benefits or credit limit perspective, keeping them open increases your average account age.
If the card is a poor quality "starter" card, such as a secured card with an annual fee, call the bank and see whether you can upgrade or downgrade to a better product (such as a card with no annual fee) without opening a new account. This is called a "product change" and many banks make this possible.
You won't want to put a lot of spending on non-rewards credit cards, but be sure to make at least one purchase a year on your oldest accounts in order to keep them open.
2. Lowering your balances relative to credit limits
Nothing kills your credit faster than getting a new credit card, maxing it out, and then making only the minimum payment. Banks like to see a healthy balance between your available credit and the amount of credit you utilize. By paying off your balances to lessen your utilization rate, you'll see a bump in your score.
3. Taking a car loan or leasing a car
If you're planning to buy a car, you might want to consider getting an auto loan - even if you could otherwise pay cash for the car.
Many credit unions offer attractive auto loan rates for people who are building credit, because auto loans are relatively lower risk (after all, if you don't pay, they just come and take the car). There is no better way to build credit fast, especially if you're starting from zero. If you'd like to drive a new car, leasing one is as good as buying one because lease payments show up on your credit report as well.
4. Buying a house
Naturally, you shouldn't buy a house for miles and points (although some financial institutions offer miles and points to take a mortgage through them), nor should you buy one to build credit.
However, if you're already in the market, you can feel good about your choice for another reason. The very top credit scores - think over 780 - are typically only achievable with a mortgage on your credit report. Why? Mortgages are open for a very long time, the balances are high, and you make payments on them monthly. Paying your mortgage on time for many years demonstrates a highly responsible credit history.
5. Opening more accounts
It may seem counterintuitive, but having more credit cards can make your credit score go up. Why? It reduces your average credit utilization because you'll have more credit lines available, and will (presumably) be using less of them. Additionally, if you use these accounts, you're demonstrating responsibility across multiple credit lines.
There is no real mystery to building good credit. Obtaining and responsibly using credit over time is what builds your score. The more money that you have borrowed and paid back on time, the higher your credit score will be. So be sure to charge everything you can on a credit card, and always pay it back on time.