You aren’t born with a credit score or credit history. Instead, building credit is something you have to work at, and there tends to be a fair amount of misinformation about what you can or should do to build credit and what will negatively affect your credit score. If you’re still in your twenties, it’s best to separate fact from fiction and rumor from reality about credit as soon as you can. Forget what you think you know about credit and get to know what’s actually the truth.
Carrying a Balance
At some point, someone might have told you that carrying a balance on your credit cards each month is a good idea and a good way to build your credit score. While your credit utilization ratio, or the amount of credit you’re using compared to the amount you can use, does have an effect on your credit score, keeping a balance on a card does nothing when it comes to building credit. What carrying a balance does do is require you to pay more in interest over time and can make you more likely to end up deeper in debt. If you hope to boost your credit score, your best option is to use your credit card to purchase things you can afford, then pay off the entire balance on each card before the due date every month.
Opening and Closing Accounts
There’s often confusion when it comes to opening new credit accounts, closing accounts, and keeping your credit score up. It’s true that opening a new account will lower your score. But, according to MyFico, opening new accounts won’t have a huge impact on your score. It might drop by a few points, but will usually recover pretty quickly.
If you hope to build or maintain your credit score, it’s best to leave older accounts alone. Closing an account, such as a credit card you’ve had since you were 18, can actually work against you in two ways. First, closing an account you’ve had for a long time shortens your credit history, and credit history makes up a considerable percentage of your FICO score. You also reduce the amount of credit you have available when you close an account. If you have a balance of $1,000 on one credit card and have two credit cards with limits of $5,000 each, your credit utilization ratio is 10 percent. But, if you close one of those accounts and continue to have a $1,000 balance, your ratio jumps to 20 percent, which is less impressive. The best option for building credit is to leave your old accounts alone and only to open new ones when you need to.
A Prepaid Card and Credit Scores
Your prepaid debit card or the bank card you have connected to your checking account won’t do anything to build your credit, since you aren’t borrowing money when you use them. The only type of plastic that helps your credit history or score is a credit card. While prepaid cards won’t help with building credit, they do have a number of advantages, particularly if you are trying to budget for the first time or want to avoid taking on additional debt.
It can be tough to figure out what really helps when it comes to credit, what doesn’t have much of an impact and what can actually be bad for your credit. No matter what your financial goals are, getting your credit off on the right foot is essential. Non-profit credit counseling can get you on the path towards building a healthy credit history.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
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