Step three: If you're carrying credit card debt, figure out a plan to pay it off as quickly as possible. For one, the faster you pay it off, the less interest you'll pay on that debt. But carrying debt—even if you're diligently paying the minimum or a little more each month—can actually hurt your credit score too.
"Most people don't understand the amount of debt on your card affects your score," explained John Ulzheimer, president of consumer education at CreditSesame.com. "Paying the minimum is good, but it's hardly going to lead to better credit."
It's all about the debt-to-limit ratio. If you can't pay it all off within a month, which is ideal, be sure that what you owe is less than 30 percent of your total credit limit. How much you owe compared to the total credit you have, also known as your debt utilization ratio, counts for a whopping 30 percent of your percentage score.
Here's how the rest of your credit score breaks down: 35 percent is your payment history, 15 percent is your credit history, 10 percent is the mix of credit you use—creditors want to see that you can responsibly handle payments from utility bills to credit cards and student loans—and 10 percent is new credit. (Opening several credit accounts in a short period of time is seen as indicative of greater risk.)
Step four: Keep your cards active and don't close credit cards you've paid off. Make sure to use your cards at least a few times a year (and pay off the balance within 30 days to avoid paying interest), so that the accounts remain active. Card issuers may close accounts if cards remain inactive for too long, thereby removing it from your credit history.
If you paid off a credit card and don't use it, you might be tempted to cancel it. But don't. "It isn't good to close cards for your credit score. A very good strategy is to use it like credit score insurance, so if someday you want to use it you can," said Ulzheimer. In the process, it helps your credit history.
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When shopping for new credit, Lin cautions against applying for too many cards at one time, which can ding your credit, and recommends keeping a close eye on the interest rate for the card you choose.
If you're in your 20s, it can take a little time to build up history, but it isn't just about getting a card and using it. Paying on time is an important factor—whether it's a credit card, a cable bill or a student loan payment.
"Building good credit is so important because of its vast influence," said Ulzheimer. "It's not terribly hard [to do] and usually happens organically over time as you apply for and open accounts like credit cards, auto loans and mortgages."
But putting a little more effort into boosting your credit score now can save you big money later.