5 Tips to Improve Your Credit Health This Financial Literacy Month

Most schools don't teach financial literacy ^[1], which means many people must figure it out for themselves as adults. That's why April is Financial Literacy Month – a time to learn how to take control of your finances.

But understanding financial concepts is challenging when there's so much misinformation out there – especially when it comes to credit. To provide some clarity, we offer five simple ways you can improve your credit this month.

[See: 12 Simple Ways to Raise Your Credit Score ^[2].]

1. Understand Your Credit Card Options

The easiest way to maintain or improve your credit score ^[3] is by using a credit card responsibly. But you can't just sign up for any credit card – you have to qualify.

If you have good or excellent credit, you'll qualify for 0 percent introductory interest offers and cards with the best rewards. If you have fair credit, you'll likely qualify for cards with lower rewards rates and fewer perks. And if you have bad or no credit ^[4], you might qualify only for secured cards – which are backed by a cash deposit – or need a co-signer to get credit.

Apply only for cards that you're likely to get based on your credit score. Every application shaves points off your score, and if you're rejected, you incur that penalty without the offsetting benefit of having access to more credit.

Your current card issuers or other credit account providers might offer free access to your credit score. You can also buy one from any of the three credit bureaus: Experian, Equifax and TransUnion. Make sure to purchase a FICO score ^[5], as it's the scoring model used most by potential lenders.

Each issuer's website and promotional materials should tell you if the card you want is suitable for your credit score. If you can't find any information, ask the issuer.

2. Know the Impact of Getting New Cards and Closing Old Cards

Opening a credit card account triggers a new credit penalty on your score. The longer your credit history, the smaller the impact, but you'll likely lose at least a few points. That's why we recommend spacing out card applications by at least six months.

According to a NerdWallet survey ^[6], more than 3 in 4 Americans (78 percent) don't realize that closing an older, paid-off card hurts your credit rather than helps it. In fact, it's more harmful to your credit than opening a new card. When you cancel a paid-off card, you're reducing your available credit without changing your total balances. That increases the percentage of your available credit that you're using, which is called your credit utilization. Higher utilization dings your credit score.

Let's say you have three credit cards: One has a $5,000 limit and a $3,000 balance; the others have limits of $4,000 and $1,000 and no balances. Your overall utilization is 30 percent, or $3,000 out of $10,000. If you close your card with a $4,000 limit, your utilization shoots up to 50 percent.

Canceling a card also decreases the average age of your credit accounts. Closed accounts remain on your credit report for 10 years, but without activity, they affect your credit less and less as time goes on. This is why canceling your oldest card is particularly damaging to your credit.

We recommend leaving older cards open, unless you aren't using them and they have annual fees. Charge a small, recurring expense – such as your Netflix subscription – to your little-used cards to keep them active.

3. Reduce Your Balances Faster

Decreasing your credit utilization by paying down your debt ^[7] is one of the fastest ways to improve your credit. There are two main ways to put more money toward debt payments: make more or spend less. A combination of the two will have the biggest impact, but any progress you can make is great.

If you've earned rewards that haven't been earmarked for something else, consider redeeming them as a statement credit or cash to put toward your balance. Review the values of rewards and the best redemption options to determine if that's the best choice for you.

[See: 10 Easy Ways to Pay Off Debt ^[8].]

4. Learn How APR Works

If you pay your balance in full each month on or before the due date, you don't have to worry about your card's APR ^[9]: You only accrue interest when you carry a balance from one month to the next.

If you do carry a balance, it's important to understand how APR works. You accrue interest on your average daily balance, not the balance the day after the payment is due. If you know you're going to carry a balance, make multiple payments throughout the month. This will reduce your average daily balance, and therefore, the interest you'll accrue.

If you're carrying credit card debt but have a good credit score, consider a 0 percent balance transfer card. Most cards charge you a small fee to transfer your balance, but you'll enjoy 0 percent interest for a period of time – usually 12 to 18 months. Pay off your balance in full before the offer expires to avoid interest charges.

[See: How to Live on $13,000 a Year ^[10].]

5. Practice Patience

Improving credit can take a while – but over time your credit history lengthens and old, negative marks have less impact on your score.

If you've started doing all the right things for your credit health, sit back and let time do its thing. Once you've built a good credit foundation, you'll enjoy the rewards for years to come.