Personal Insights

What to Avoid When You Want to Build Your Credit

Whether you’re trying to establish credit for the first time or re-establish credit after a misstep, a good credit score can be the key to unlocking financial opportunities.

“Credit is often necessary if you want to make a major purchase, like a house or a car. Having good credit can help you get the best interest rates on a purchase you make using credit.” says Keith Harrah, Senior Vice President of Credit Risk Management for Regions Bank. “It may even play a role in the selection process for some jobs and landlords.”

Here are five things to avoid when you’re trying to build your credit score:

1. Failing to Establish Credit

You can’t build credit, Harrah points out, unless you establish it in the first place. If you have no credit or weak credit, one way to start is with a savings secured line of credit or a secured credit card, both of which are secured by funds in your deposit account. “Making monthly payments on time can help folks build credit when they have none,” explains Harrah.

Often, the bank will put a hold on the security deposit in your savings account so that you are unable to use it. In the long-run, this can help build savings and credit because once you pay off the loan through on-time monthly payments, you still have your original deposit in your savings account.

2. Making Late Payments

Your payment history typically accounts for one-third of your credit score, according to Harrah. Consistently paying down your credit balances on time is the best way to demonstrate to lenders that you’re a responsible consumer, he says. If you don’t pay on time, and end up with bad debt, it will stick on your report for seven years.

“If you don’t pay and it gets reported to the credit bureaus, that will have an adverse effect on your credit rating,” explains Harrah, who says that you may have a little more time to pay your bill than you realize before your delinquency will affect your credit score. Typically, financial institutions don’t report delinquencies to the credit bureaus until your account is 30 day past due; however, to avoid late fees, it’s best to pay all bills by their due dates.

3. Using Too Much Credit

You should use the credit you do have modestly. “Don’t use every ounce of credit you have,” says Harrah. “It shows discipline and maturity when you have a credit line and you consistently charge less than the maximum that’s allowed.” Even if you are paying off your cards and lines of credit each month, you may be getting dinged for utilizing too much of the credit extended to you. Consider all the credit you have available to you, and try and use 50% or less to help prevent your score from going down.

4. Using Only Credit Cards

Harrah says a strong credit score is the product of credit cards as well as installment loans. “Credit cards today are essential, but having only revolving credit on your file is not as good,” he explains. A mortgage or auto loan, or even a big-ticket purchase at a local retail store that offers financing options can help you diversify your credit file. “With an installment loan, you have a fixed monthly payment; when you pay that every month, it tells lenders you know how to budget.”

5. Canceling Old Credit Accounts

Although you might be tempted to rid yourself of old credit cards, it might behoove you to keep them instead of getting new ones. The length of your credit history — including your oldest open credit account — is one of several important factors on which your credit score is based, according to Harrah. Older credit that is paid well is a strong part of your credit history.

“It’s important to hang onto the oldest credit card you have,” Harrah says. “Of course, you need to evaluate what it’s costing you in annual fees and interest, but if you have a credit line that’s in good standing and it’s not costing you anything to have it, holding onto it may be very wise.”

No matter how low your credit score is today, avoiding these five mistakes may help you build your credit tomorrow.