How to build a credit history and achieve your financial goals

A higher rating can make borrowing financial products more affordable

Take quick action if a mistake on a credit report is dragging your score down. Silvia Razgova / The National

You’ve got big financial plans for 2023. Maybe they include buying a home or car, or getting a new travel rewards credit card to help to pay for your next trip.

There’s a key piece of these plans you may not have considered: building your credit history.

A better credit rating can expand your access to funding and make borrowing more affordable. For example, having a score of 700 versus 650 could mean getting approved for a new-car loan at 4.9 per cent interest instead of 7.25 per cent interest.

So what can you do to get your score in shape? Here are a few ways experts suggest boosting credit in the new year.

Pay off holiday debt

When holiday festivities conclude, you might be stuck with leftover debt from food, travel and gift purchases (on top of regular bills, of course).

If missed payments or large balances carry over into the new year, your credit score could suffer.

Payment history (whether you pay bills on time) and credit utilisation (the amount of credit you’re using compared with your limit) are the two biggest factors that affect your credit score.

So make a plan to pay down your holiday debt. Start by reviewing your account statements to understand exactly how much you owe and how much you can afford to budget for repayment, says Jeff Arevalo, a financial expert at GreenPath, a non-profit credit counselling agency in Michigan.

“If you’re only paying minimums, unfortunately, it’s going to take you a longer time to pay the debts. Interest rates have increased, and so paying minimums is not a recipe for success,” Mr Arevalo says.

Knowing your budget allows you to see if you’re in a position to make more than the minimum payments on your debts, he says.

Perhaps you earned an extra pay cheque in December or a holiday bonus that you can put towards debt.

One strategy to consider is paying above the minimum on your most recently opened accounts first, says Todd Christensen, education manager at Money Fit, a non-profit debt relief service in Idaho.

“Paying down balances on new accounts will help build credit faster than paying down the balance on all accounts,” Mr Christensen says.

Protect your credit score by setting up automatic payments or payment reminders to help you pay bills on time going forward.

Don’t apply for credit too often

Applying for new credit several times in a short period can raise a red flag and negatively impact your score. With each application, you’ll get a hard inquiry on your credit that may cause your score to drop a few points.

“If I’m applying for a credit card once or twice a month, that’s kind of showing the credit scoring model that I’m desperate,” says Kate Mielitz, an accredited financial counsellor in Washington. “Desperation is not a good look in credit.”

Lenders that view you as a risk may reject your application or offer less desirable terms, such as high interest rates.

Think carefully before applying, especially if you plan to make a decision involving credit — like applying for a mortgage — within the next few months.

Raise your credit limit

Ask issuers to increase your credit limits on existing accounts. Higher limits will lower your utilisation, as long as your spending doesn’t creep up.

To build your score, experts recommend keeping your utilisation under 30 per cent of your limit.

Inspect your credit reports

Credit reports are records of your credit history. Staying on top of your reports is crucial because scoring companies use the information on them to create your scores.

If a mistake on a report is dragging your score down, such as a reported late payment that you actually paid on time, take quick action to dispute the error with the pertinent credit bureau.

“Some people worry that the report is kind of long, there’s a lot of abbreviations and things like that. But like with anything in life, I think it’s not as intimidating once you kind of get used to it,” Mr Arevalo says.

Make checking your credit reports a regular habit.