Six Steps to Good Credit

A good credit rating is a requirement for taking up tenancy in a swanky apartment. If you’re stuck living in flood-prone places with cracked windows and noisy neighbors (made even noisier by the super-thin walls), think about boosting your credit rating so you can qualify to live somewhere a little bit nicer.

Step One: Get a credit check-up

It seems odd, but even you may not know all the information that’s on your credit report. Order a copy of your report from a major credit reporting agency so you can discover how leasing agents and other entities concerned with your credit score see you. What you find may surprise you—accounts you thought you closed may still be on the report, or open accounts you pay off regularly are not showing up. You should check your credit report at least once a year to ensure the accuracy of the information contained therein, and take action quickly to research and correct any possible mistakes. You are entitled to receive a free copy of your report when you’re being investigated by a potential landlord or employer, so take advantage of that opportunity to check up on your credit rating. If you don’t understand your report, talk to a credit counselor or the credit bureau who prepared the report to improve your comprehension of the situation.

Step Two: Save up

Yes, credit allows you to defer payment until a later date. But what it doesn’t do is provide you with the ability to make more money (except through a cash advance, which brings with it astronomical interest rates that will do nothing but sink you further into debt). While you tend to be most in need of your credit card at times when you can least afford to pay it off, stay sane, budget well, and buy only what you can afford. Saving up in preparation for hard times—not maxing out your credit card if hard times come along—is what will get you through difficult spots in life.

If you’re in between jobs, maintain focus and use your credit wisely. Taking out a loan (if you qualify) may be more reasonable than getting a cash advance (and an exorbitant interest rate) through your credit card. Explore the possibility of receiving unemployment benefits, and negotiate the best severance package you can get if you are let go.

Step Three: Pay up

The absolute best way to improve your credit rating is obvious, but effective: pay your bills in full and on time. If you can’t pay in full, pay as much as you can, but pay right away, and make sure that check gets mailed promptly. Paying in full doesn’t do much good if the payment is two months late because you needed that much time to save up the money (and accumulate more bills in the process). Even if you only make the minimum payment, paying on time will allow you to maintain a good credit rating. If you find yourself struggling to pay even the minimum, strongly consider reducing or stopping your use of credit cards. As a general rule, you should utilize no more than 30% of your available credit. Keep in mind, however, that your available credit may be somewhat inflated relative to what you can afford—so don’t push your limits.

Step Four: Keep accounts open

If you have multiple credit cards, some of which you don’t use, don’t automatically cancel the cards you don’t frequently swipe. If you can refrain from overspending or using credit cards to pay each other off, having a large amount of available debt can be a good thing. A portion of your credit score comes from dividing the total debt you owe by the total debt you can accrue, and having more lines of credit on more cards can help make that number look more appealing to potential lenders. (If you can’t help but max out all your cards, however, you should cancel as many accounts as possible. Having credit available to you isn’t the same as using all of it.)

In addition, canceling a credit card cancels your entire credit history (good or bad) with that card. If you have a card you’ve always paid off but no longer want to use, just keep the account open without making new charges to the card. Maintaining this account without accruing additional debts will boost your credit history. Canceling it would only get rid of a positive, paid-off portion of your credit score.

Caveat: If you’re the type who just can’t stop running up huge credit card bills, canceling accounts may be a necessary step for you. You know yourself and your spending habits, so close accounts if you know you can’t just resist the temptation to spend. Keeping accounts open is only a good thing if you can leave the majority of your available credit unspent.

Step Five: Know your limits—and set them if you need to

As stated, you generally shouldn’t use more than a third of your credit limit. If you do find yourself pushing the limit, make absolutely sure you don’t go over. In addition to damaging your credit rating, this may result in expensive fees, not to mention the interest you’ll accrue while struggling to pay your bills. If you already have a good credit rating, your credit line might increase automatically over time, whether you can afford to pay off that much debt or not. Exhausting your credit limit and getting in over your head will only worsen your credit rating. An offer of a higher line of credit may be tempting, but if you’re already in debt, you may need to be strong and reject it. Remember: credit now means nothing but bills later. Also, higher lines of credit (combined with a poor credit rating) can sometimes signal future debt to potential lenders, who may be leery of lending you money if you have a credit limit higher than you seem capable of handling.

Step Six: Auto-pay

If you’re scatterbrained about opening bills, writing checks, and sending payments on time, you should seriously consider setting up an automatic payment for your credit card bill. This will ensure that you always pay the minimum balance on time (whether you’ll have to pay overdraft fees if your bank account can’t cover the minimum is another matter, but you can prevent this by knowing what you owe and always having a good chunk of money in your bank account). Consult with your bank about online bill pay opportunities, and set up automatic payments for all your cards. This will boost your credit score and shorten your monthly to-do list when bill-paying time rolls around.

Getting a low credit score is easy and quick, but building up your credit rating can take some time. Be patient and don’t give up—the more mistakes you make, the longer it will take until you have a truly impressive credit rating.