Your credit score is a crucial factor in your financial life. Good credit can make it easier for you to qualify for the best interest rates and terms when you borrow money. The higher your credit score, the lower the interest rate you will pay on your loans.

Building credit fast can help you snag a lower interest rate, whether you’re taking out a new loan or refinancing an existing student loan. Even a small drop in the rate can save you thousands of dollars over the life of the loan.

If your credit score is not good enough to qualify for better interest rates, it’s time to work on it. First, it helps to know how credit scores are calculated.

How Credit Score is Calculated

There are multiple scoring models but they are all fundamentally the same with only minor differences from one to the other. All models calculate your score taking into account the same factors:

• Your payment history on credit cards and loans
  
• Your credit utilization ratio
  
• How long you’ve had your accounts open
  
• How often you apply for new credit
• The types of accounts you have

Knowing how your credit score is calculated will give you a better idea of what you need to do to build credit fast.

Tips #1 – Pay Bills In Full & On Time

If you do just one thing towards building credit, it should be this – timely payments on all bills. This includes student and auto loans, mortgage, and credit card bills as well as rent payments and all utility bills. Payment history is has the single biggest impact on your credit score. None of the other credit-building strategies will work if you keep making late payments.

Behind on a payment or missed an earlier payment? Arrange to pay the outstanding as early as possible. Creditors usually report a missed payment to the credit bureaus within 30 days of the deadline. Once it gets reported it stays on your credit report for about 7 years.

Paying only the minimum amount on a bill can also hurt your credit score but to a lesser extent. It’s far better than not paying at all.

Tip #2 – Lower Your Credit Utilization Ratio

Credit utilization ratio is your total credit balance divided by your total credit limit. A low ratio tells the lender that you are not maxing out your credit card often. This means you can afford your monthly expenses comfortably with your earnings and are not financially strained. This is the second most important factor that impacts your credit score.

There are two ways to keep your credit utilization ratio low:

• The first is by paying off debt punctually. Paying on the due date is good but making multiple small payments throughout the month is even better. Making multiple micropayments keeps your credit card balances low, which helps build your credit score steadily.
  
• The second is by asking your credit card provider to increase your credit limit without a hard credit check. They’ll usually oblige if your earnings have gone up or if you have a long history of on-time payments. When your credit limit increases but your balance stays the same, it affects your credit utilization ratio positively.
  

Tip #3 – Don’t Close Your Credit Cards

The length of your credit history is the third most important factor in calculating your credit score. The longer your history, the better your credit profile. When you’re trying to build credit fast, it’s best to keep all your credit cards open. When you close a credit card you lose that card’s credit limit along with its history. This impacts your credit utilization negatively and lowers your credit score too.

If you have multiple credit cards, use them all occasionally so your provider doesn’t close it. Make sure to pay off each card before the payment due date. If possible, pay it off even earlier. Keeping the cards open and paying off the dues on time will both help towards building credit fast.

Tip #4 – Apply For New Credit ONLY if Needed

Sure, it feels good to have multiple credit cards. Having multiple cards increases your overall credit limit. The downside however, is that every new credit application triggers a hard inquiry on your credit report. Every hard inquiry damages your credit score a little bit. What’s more, every hard inquiry stays on your report for two years. Too many inquiries can hurt your score significantly. This can hamper your efforts to build credit fast. As a rule, apply for new credit only if you absolutely need it.

Another drawback to having unnecessary credit is the temptation to overspend and accumulate more debt.

Tip #5 – Create a Diverse Credit Portfolio

While it’s not the most important factor in calculating credit score, having a diverse credit portfolio does help. This could include a mix of credit cards, retail store cards, gas station cards, student loans, home loans, and car loans. Having a mix of revolving credit and installment accounts helps to improve your financial profile.

Remember – do not open new accounts just to diversify your credit mix. As we said in the tip #4, applying for new credit unnecessarily can be counterproductive.

Tip #6 – Check Your Credit Reports Regularly

There are two reasons to check your credit reports regularly.

The first is to check for incorrect information. An error on one of your credit reports can drag your score down. If you spot any inaccuracy, report it right away and get it corrected. Credit bureaus usually look into disputes and will rectify the mistake and your score within about 30 days.

The second is to see which factors are pulling your score down. That will help you take steps to work on those areas and improve your score.

There’s no way to improve your score overnight or even a week. Following the six tips mentioned above are the best way to work towards building credit fast.

There is so much to learn but there are plenty of resources to help ensure a good credit score for the long term.