Here’s the Fastest Way to Build Healthy Credit
by Sherry Hao, Controller, U.S. Money Reserve
Knowing the health of your credit is critical. Here are six ways to build healthy credit.
Managing your credit, whether personal or business, seems like a secret labyrinth. It’s intricate, ornate, and sometimes challenging to understand, especially since there are so many things that can affect your credit. In turn, your credit affects so many aspects of your life that your credit rating is impossible to escape. Never fear if you’ve made credit mistakes in your business or personal life. While it can seem daunting to rebuild your credit so it’s healthy and robust, you can use any of several quick methods to do so. Here’s how.
How to Build Healthy Credit Fast
1. Understand What Healthy Credit Is and What it Does.
First, it’s vital that you gain an understanding of exactly what your credit is, what impacts credit, and what doesn’t impact credit. This holds true whether related to your personal or business finances.
Credit is an essential part of our capitalist society. It allows lenders to loan borrowers money with a promise that the borrower will pay the loan back with interest. We use credit for everything from financing homes to buying groceries, and it permeates every adult’s life.
Your credit score gives you an idea of whether you have healthy or unhealthy credit. Credit scores are assigned to individuals and businesses and help other lenders (and, in some cases, employers) determine whether an entity or person is worthy of having access to new or further credit or loans.
For individuals, credit scores range from 300 to 850, and depending on which of the big three bureaus you pull the score from, these can vary widely. Generally, you are considered to have healthy credit if your credit score is above 629. Scores closer to the 629 threshold are less healthy than those at the top of the range, of course. The three personal credit reporting bureaus are Equifax, TransUnion, and Experian, and each reports your credit differently, which means you can and often do have three different credit scores.
For businesses, credit scores range from 1 to 100. Scores above about 50 are considered to be healthy, while those 50 and below are unhealthy. If you’re interested in learning more about business credit scores, you can read about them over at Experian. There are also three business credit bureaus: Dun & Bradstreet, Equifax, and Experian. Like agencies that handle consumer credit, each business credit bureau weighs different aspects of credit differently, and a business’s credit score can differ significantly from one bureau to another.
2. Know What Affects Your Credit Score for Better or Worse.
Now that you have a grasp of what credit is and what it does, it’s time to take a look at what factors influence your credit score. For individual credit, things like your credit usage ratio, your on-time payment history, how long you’ve had credit, your mix of credit types, and any recent credit applications can all affect your score.
Your credit usage ratio is the percentage of credit you have used on an available credit line. For example, if you have a $10,000 credit line on a credit card and have used $9,000 of it, you’re using 90% of your credit line. Most experts recommend that you don’t use more than 30% of your available credit line to keep your credit score high.
Your on-time payment history is a significant consideration for most credit bureaus. The more on-time and full payments you have made, the better your credit score is.
The length of time or credit history you have also plays a significant role in your credit score. If you have a long history of being in good standing and paying off any loans and credit you borrowed, your score is likely to be higher.
Credit types also play a significant role in your score. There are two main types of credit: revolving credit and close-ended credit. Revolving credit is the kind of credit you get on a credit card. Any outstanding balance rolls forward each month and is charged an interest rate. On the opposite end of the spectrum sits close-ended credit. This kind of credit has a payoff date, and you pay a specific amount each payment period to pay down the total debt. Examples of close-ended credit are vehicle loans and home loans. At some point in the future, the entire balance of such loans will be expected to be paid in full.
Recent credit inquiries or applications can affect the health of your credit, too. If you’ve had several credit pulls, primarily what are known as “hard credit pulls,” your credit score may be lower than you expect. Hard pulls are usually only used when you go for a loan, be it a house or car loan, or if you’re opening a line of credit.
When it comes to business credit scores, many of the factors are the same, but a few stand out. For one, credit bureaus consider a business’s credit capacity. According to the Small Business Administration, “This is an evaluation of your company’s ability to repay on a loan or business line of credit. This includes positive cash flow, bank history, payment history, and additional cash sources and reserves. The best way to show your credit capacity is with positive cash flow, a favorable bank rating, and positive payment history with other businesses.”
Business credit agencies also look at the amount of capital you’ve invested back into your business and any collateral you have that could be sold off if you cannot pay back your loan.
3. Pay Your Bills on Time, Every Time.
If you’ve fallen into arrears or had to utilize more credit than you’d like, your credit score may have taken a hit. If you want to fix your credit, start by paying your bills on time (or even more frequently) all the time. As I mentioned above, you also want to stay below the 30% credit utilization point to maximize your credit score. NerdWallet recommends that you aim even lower and keep that utilization score around 7% to boost your score quickly.
4. Pay Off Any Existing Debt and Keep It Paid Off.
Paying off a credit card or a loan can do plenty to help boost the health of your credit. That’s because paying off your debt lowers your debt utilization, which means you have more credit available should you need it. Lenders like to see borrowers who have high credit availability but who don’t utilize all of it.
Once you pay off any debt, do your best to keep it paid down by either paying off the total amount each month or eventually closing the account and paying the total loan. Doing either will help to quickly raise your credit score.
5. Deal With Any Credit Reporting Errors and Disputes.
Each year it’s vital to take a close look at your credit reports and make sure there are no outstanding errors on them. Errors in your credit report, whether your personal report or one for your business, can hurt your creditworthiness if you’re looking for financing. If you see an error, work through the credit reporting agency where the error shows up to dispute it and ensure that it gets removed. Unfortunately, this process can be slow, complex, and incredibly frustrating, but with some due diligence and hard work, fixing errors can make a huge difference to your credit score.
6. Request a Higher Credit Limit.
Another way to improve your credit score quickly is to request a higher credit limit. This can help improve your credit utilization score, even if you carry a balance. That’s because your debt-to-credit ratio improves when you have more credit available but keep the same outstanding balance. As I mentioned above, creditors like to see much available credit balanced with far less usage.
The Bottom Line on the Fastest Way to Build Healthy Credit
Building and maintaining healthy credit takes work, time, and patience, but it can be done. It’s essential to ensure that you stay on top of your credit scores for your personal and business accounts to catch any reporting errors early. You can get a free personal credit report once a year by visiting annualcreditreport.com. It’s the only site that the Consumer Federal Protection Bureau backs for getting your yearly report. Because of the ongoing COVID-19 crisis, many credit bureaus also offer annual credit reports for free. Go directly to each credit bureau’s site to get your credit report. If you want to get a business credit report, it’s best to go to each credit bureau site and pull it from there. You can also bundle your business credit reports, according to Bankrate.
Regardless of how you choose to get your scores, it’s important to understand how these factors can affect your credit health. Maintaining healthy credit, just like maintaining a healthy body, requires regular work and attention. Still, with a little time and effort, you can make big changes to your credit and secure your financial future.
