As a frequent traveler, I’m a big fan of my travel rewards credit cards. Every time I make a purchase, I earn back rewards points that I can use toward my next trip.
Last winter, I was able to take an impromptu trip to Tulum, Mexico on points alone. I spent a week on a white-sand beach, and my flight and hotel were entirely covered by rewards points.
But it’s tough to qualify for credit cards with perks like these if you don’t have a decent credit score, usually in the mid-600s or higher (the range is 300 to 850).
A low or non-existent credit score can also make it difficult to take out a loan, get a mortgage, or rent an apartment.
If you’re a digital nomad, you might not be overly concerned about this now, but it could become important if and when you decide to return to the U.S.
How to improve your credit score, step by step
Whatever your goals, here’s what you need to know about establishing credit and increasing your credit score.
1. Learn what makes up a credit score
Before you can learn how to increase your credit score, you need to understand what makes up a credit score. A credit score represents your financial history, specifically as it pertains to managing debt and credit cards.
There are actually multiple services that calculate credit scores; two of the most famous are your FICO score and Vantage 3.0 score. Although the calculations vary slightly, most take the same few factors into account.
Here’s what makes up your FICO credit score:
- Your payment history (35%), such as your repayment of loans and credit cards, or any history of bankruptcy.
- The amount you owe (30%), or the total you owe on loans or credit cards. Your “credit utilization” is also important. It’s the amount of credit you use versus how much you have access to. So if your credit cards offer $4,000 in monthly credit and you use $1,000, your credit utilization is 25%. You usually want to keep your credit utilization at 30% or lower.
- Length of credit history (15%), or how long you’ve had accounts, such as loans or credit cards, in your name. If you’re a new college graduate who’s never had a credit card, you could be starting from scratch here.
- Credit mix (10%). Having a mix of different types of credit, such as student loans, credit cards, a mortgage, etc, can show a lender that you’re able to handle different types of credit.
- New credit (10%). New accounts that you’ve opened recently can also impact your score. Opening too many new accounts at the same time can unfortunately ding your credit score, though it usually doesn’t take too long to bounce back.
As you can see, your payment history and amounts owed are the biggest factors influencing your credit score. So if you’re looking to build credit, those categories are good places to start.
2. Monitor your credit score for free
Once you understand what makes up a credit score, it’s time to take a closer look at your personal finances.
Services such as Credit Karma let you monitor your credit score for free. Note that Credit Karma shows you your Vantage 3.0 score, and it relies on information from two of the three credit bureaus (TransUnion and Equifax, but not Experian).
A lot of lenders actually rely on your FICO score, rather than your Vantage 3.0 score, when considering you for a mortgage or student loan refinancing. But your FICO score won’t be that different from your Vantage one, so Credit Karma still offers useful insights.
If you’re after your FICO score, find out if your credit cards let you see it for free. Several offer this service when you sign into your online account. Some banks and credit unions also let you see your FICO scores for free. Alternatively, you can purchase your FICO score at MyFICO.com.
Finally, you can order one free credit report per year from each of the three credit bureaus at AnnualCreditReport.com. Although this report won’t show you your score, it will let you get an overview of your accounts and history of repayment.
And if you see any errors, you can submit a dispute and get them wiped clean from your report. Unless you’re really dying to see your exact FICO scores, a service like Credit Karma is totally sufficient for monitoring your progress as you take steps to increase your credit score.
3. Establish credit with a secured credit card or the help of a cosigner
You might have noticed a Catch-22 in this credit score business. You need to have credit (a credit card, loan, etc.) to have a good credit score, but you can’t qualify for a line of credit without having a good credit score first.
So if you have no history of credit, how can you ever get started? Well, there are a few different ways to establish credit from scratch.
One is to open a secured credit card. These starter cards help you build credit if your score is damaged or hasn’t been established yet. Typically, they come with low spending limits. Some even have you load them up with a certain amount at the start of each month, like a prepaid gift card.
With each payment, you slowly start to establish credit. Once your credit score is strong enough, you could move onto an unsecured credit card with higher limits. Just make sure you don’t start spending beyond your means!
Another way to open credit in your name is to apply for a loan with a cosigner. A cosigner, such as a parent, can help you qualify. But remember that your cosigner shares the debt, so their credit is on the line if you fall behind on payments.
Finally, a parent or friend could add you as an authorized user on one of their credit cards. You don’t even have to use the card, but their on-time payments could help you start to build credit in your name.
Eventually, you’ll have a strong enough financial history that you can open lines of credit on your own.
4. Make on-time payments on your loans and credit cards
Once you have some lines of credit, it’s crucial to make on-time payments. Falling behind could cause major damage to your score. In fact, late payments can stay on your credit report for as long as seven years.
Plus, going delinquent on debt causes a whole host of other problems. Debt collectors could start calling your friends and family. If you go into default on federal student loans, you could face garnishment of your wages, tax refund, or Social Security benefits.
Private lenders could even bring you to court for walking away from debt. And falling behind on credit card payments could create a hole of debt that’s hard to dig yourself out of, since credit cards come with extremely high interest rates.
So save yourself the headache by staying up to date on your payments. And by making on-time payments, you’ll keep improving your credit score, perhaps even one day breaking the 800-mark of exceptional credit.
If you do have accounts that have fallen into default, do your best to get them out of collections and back into good standing.
5. Pay off your debt
Not only will making on-time payments boost your credit score, but so will paying down your debt (and as a result, lowering your credit utilization ratio).
If you’re carrying a lot of student debt, for instance, take a look at your budget and see if you could afford extra payments. By throwing extra payments at your loans, you’ll save on interest and get out of debt ahead of schedule.
It’s also a good idea to pay off any credit card debt, as that will typically come with the highest interest rates. In fact, when using a credit card, try your best to never spend more than you can afford to pay off each month. That way, you’ll stay within budget and never pay a cent in credit card interest.
Paying down debt will help you keep your credit utilization under 30%. You might also consider opening up more credit to reduce this ratio.
You could open one or two more credit cards (with no annual fees) to increase the amount of credit available to you. Of course, only go this route if you can keep your spending in check.
Outside of improving your credit score, your biggest priority should be maintaining financial wellness and avoiding burdensome debt.
6. Open a variety of accounts (but not all at once)
Your “credit mix” makes up about 10% of your credit score. While it’s not as important as making on-time payments or getting rid of debt, it does play a role.
That’s not to say you should go out and take out a bunch of loans you don’t need. If you’re loan-free, it’s probably better to stay that way as long as you can.
But having more than one credit card could help, as long as you don’t overspend. Note that opening a credit card could temporarily ding your credit score, since lenders will need to make a hard inquiry on your credit report.
Take advantage of “soft credit checks” and instant rate quotes when you can. Even if your score does dip slightly, it will bounce back if you keep making on-time payments and keeping your credit utilization low.
7. Keep your old accounts active
Finally, your history of credit plays an important role in your score. The longer you hold an account in your name, the stronger your score is likely to be.
I accidentally let one of my oldest credit cards lapse recently, and my score took a hit as a result. I wasn’t using the card at all, and the credit card company deemed the account inactive and closed it.
Unfortunately, my next most recent card was several years newer — not nearly as impressive in the eyes of the credit score gods. I learned the hard way that your length of credit history plays an important role in maintaining your score.
So get started early if you can, whether by opening a secured card or getting added as an authorized user onto your parents’ card. And if you have credit cards you rarely use, try to make a purchase every once in a while so the credit company doesn’t deactivate your account.
Improve your credit score to increase your options
When you have a weak credit score, it can feel like doors are shutting in your face. By increasing your score into the good or excellent range, you’ll be able to borrow money when you need it or open a lucrative travel rewards card.
Check in with your credit score every once in a while to make sure you’re on track with your financial goals. And try your best to make on-time payments on any debt you’re carrying, as falling behind will dent your score and cause a lot of stress.
If you’re carrying student loans, check out this guide for concrete tips on how to pay them off faster and move closer to a debt-free life.