There are people out there who expend a lot of energy in the quest for a totally meaningless perfect credit score, which I've written about elsewhere. Most people know it's important to have good credit, but they don't want to spend too much time worrying about it. The good news is that you can be pretty lazy and still improve your credit.
The difference between having good credit (generally from 700-749) and bad credit (anything below 620) can mean the difference between getting the car you want versus the car with monthly payments you can afford. A well-managed credit history can make home ownership possible years before a poorly managed one, while really bad credit could cause you to lose a rental apartment to someone more vigilant about their personal finances.
Credit is an investment that accrues value through behavior. If you do the right things, your score will increase. Like an investment portfolio, your credit portfolio can improve your quality of life. But just like any investment, a credit portfolio requires some basic knowledge and maintenance.
Here are four very easy things you can do to start improving your credit.
|Let Your Accounts Get Older|
The age of your credit history accounts for roughly 15% of your overall credit score. In the same way car insurance companies use age to predict how risky it is to insure a driver, the three credit bureaus use the age of your credit as a way to determine your likely behaviors.
The older your credit history, the more information the bureaus have about your habits, and account age goes to predictability. Would you rather lend money to someone who has kept an account in good standing for 12 years or one year?
While most blots and blunders on your credit report fall off after seven years -- they have their own credit score silo -- the age of your credit continues to positively affect your score. The best part? You just have to keep doing what you’ve (hopefully) always done and keep using credit responsibly.
|Stop Searching for New Credit|
Every time you apply for credit, a lender makes a hard inquiry into your credit. The number of inquiries can have a big impact on your credit, accounting for 10% of your overall score. Inquiries remain on your credit reports for two years, but only those within the past year count, at least with the majority of credit scoring models. And certain types of loan shopping – for auto, student loan or mortgage loans -- will result in only one inquiry on your credit report if you shop within a short window (two weeks is safest).
Not shopping for credit until you really need it is a simple strategy that requires you to do nothing, and can be a good thing for your score over time.
|Ride the Coattails of Someone With Good Credit|
This trick doubles as a training tool. Parents often add their teenage children as an authorized user on a credit card to teach them about using credit responsibly.
There are other situations where becoming an authorized user on an account owned by someone with a strong credit history can be a good idea. Specifically, if a family member, spouse or significant other has bad credit, you can let them "piggyback" on one of your accounts. For the authorized user, this is the ultimate trick because it requires no effort at all. As long as the account remains active, the authorized user doesn't even need to use the credit card and can benefit from the positive credit history. Many people employing this strategy opt to cut up the authorized user's card so he or she isn't tempted to use it.
While this is a lazy trick for one party, the person helping out might want to put in a little extra time making sure nothing crazy happens on their credit accounts. If you are an authorized user, make sure the account you’re added to is in good standing, and stays that way. Any mistakes made by you or the primary user can make this tactic counterproductive to your credit building efforts.
|Let Your Bank Make Payments for You|
Paying your car loans, mortgages and credit accounts on time is the single most important factor in determining your creditworthiness. Thirty-five percent of your score is based on this one factor. Since you are going to pay these bills anyway, set them up for auto-pay through your checking account.
The peace of mind you will get knowing every bill is being paid is so much more valuable than the time you need to invest making sure there’s enough money in your checking account to cover expenses.
Managed correctly, your credit portfolio is a guaranteed way to get the things you want in life. You don't need to obsess over getting a perfect score, you just need to work on making it better. And building credit doesn't have to be a complete mystery; you can watch your credit scores improve for free every month on Credit.com.
Adam Levin is chairman and co-founder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.