The measure of your credit is determined by your credit score. Therefore, the higher your credit score, the “better” you credit is. Conversely, the lower you credit score, the “worse” your credit is. While the exact formula for calculating a credit score is unknown, it is public knowledge that certain factors make up a large part of your credit score. Such factors include your credit utilization ratio, the average age of your credit accounts, and the timeliness and consistency of your payments.
If you wish to build good credit the first factor to consider is the average age of your accounts. Credit accounts are like fine wine, they get better with age. If you have young or new accounts, this could weigh negatively on your credit score as creditors will not yet know if you are responsible with your credit. Unfortunately, there is nothing you can do about this except wait. As you become older, so do your accounts. With older accounts, potential lenders will have a better idea of your financial responsibility and as such, your credit score will prosper.
One factor that is semi within your control is your credit utilization ratio. The credit utilization ratio tracks the ratio between how much debt you have against your total amount of available credit. Therefore, if the total of your credit lines is $1,000 and you currently owe a total of $100, your credit utilization ratio would be 10%. If you keep your credit utilization ratio under 30%, your credit score will be just fine.
The problem with the credit utilization ratio is that it is not always within your control. If you monitor your spending and pay off debts, you can maintain a less than 30% ratio. However, if you read the fine print in your credit card agreement, you will see that your credit card company can close your account at any time for any reason. As such, if your account is closed by your credit card company, you no longer have that credit line available. Therefore, your total amount of available credit decreases, and, consequently, your credit utilization ratio will automatically increase.
Fortunately, there is one factor that is completely within your control. You, and you alone, control the timeliness and consistency of your credit card payments. If you make timely and consistent payments throughout the life of your credit, you will be providing the single largest boost to a credit score that you can possibly provide. As such, make your payments on time at all costs.
Although not all of the factors for building good credit are completely within your control, if you make timely, consistent payments, keep your credit utilization ratio low, and let your accounts grow old, you will be in a fantastic credit position.