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Budgets and Money

How to build credit

A good credit score can be an important part of reaching long-term financial goals. Here are several tips to effectively build your credit.

Your credit score is one of those key numbers that can make a big difference in your financial life. A great score can translate to far better rates on car and home loans, while lower scores mean you may encounter higher fees and interest rates — or even be refused credit or loans.

Credit cards are usually the first place people start to build credit. However, if you aren't careful, it's easy to overspend and find your credit score taking a hit. That's why you should manage your credit responsibility and, if your score is low, work on improving it. Here's how.

How to build credit

There are many factors that go into your credit score. These include how much credit you have versus how much you're using, how often you pay on time and the age of your accounts.

If you're just starting out, or have been using credit cards for a long time, there are a few key ways to build good credit:

  • Avoid maxing out your cards  A good rule of thumb is to try and keep your current balances to about 30% of your available credit line. That means if you have $10,000 available on one card, you want to try and keep that balance under $3,000 — and, ideally, you want to pay your bill off each month.
  • Pay your bills on time  One of the easiest things you can do to build and improve your credit score is to always pay your bills on time. Set up a calendar reminder, sign up for alerts or set up auto payments for all your bills to stay on schedule each month.
  • Maintain a few types of debt — Variety is a good thing when it comes to your credit score. So having a few credit cards, a car loan and a mortgage shows you're able to manage different types of debt.
  • Just following the basics — keeping your balances low and paying your bills on time — is the foundation you need to build good credit or improve your credit score over time. 

Something else to remember is you can check your credit score for free each year. It's a good idea to know where you stand and check your credit report for any errors which you can dispute, if needed. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report, at your request, once every 12 months. 

6 factors used to calculate your credit score

While each credit reporting agency may emphasize different aspects of your credit, most are concerned about the following six factors: 

  1. Your credit card utilization rate — Lenders like to see that you can use your credit cards responsibly. Your utilization rate is based on how much of your total available credit you are using. For example, how many of your credit cards are at their maximum limit every month? The higher your credit card utilization, the lower your score. 
  2. How consistently you make on-time payments — This is a factor on which your credit score is heavily weighted. Keep in mind that even one or two late payments can have a negative effect on your credit score. When you pay your bills on time, lenders view you as a responsible borrower. 
  3. Number of derogatory marks — A bankruptcy, foreclosure, tax lien or other collection is an indication that you have a history of mismanaging your credit and can significantly hurt your credit score. 
  4. Average age of open credit lines  The amount of time your accounts have been open, averaged across all your accounts, helps creditors assess your creditworthiness. 
  5. Total number of accounts — Your number of accounts includes your credit cards, auto loans, mortgages, and other loans. In general, lenders like to see a good number of accounts on your report because it shows that other lenders have deemed you worthy of credit.
  6. Number of hard credit inquiries — A hard inquiry occurs when a financial institution checks your credit report to make a lending decision. Since a lot of hard inquiries may make it look like you're in dire need of credit or aren't getting approved for credit, it's best to minimize how often you apply for credit. 

Credit card considerations

Most people build their credit with credit cards. There are a few things you can do to try to get the most out of your cards. 

  • Ask for a higher credit limit — After you've had a card about six months, try contacting your credit card company to ask for a credit limit increase. A higher limit will help with your credit utilization rate, as well.
  • Consider a balance transfer  If you have a high-interest rate on one card, think about a balance transfer. Many new cards will have 0% interest introductory offers for a certain period. However, make sure you read the fine print because you could get penalized if you miss a payment.
  • Try a rewards card  Today, there are all sorts of travel and cash back rewards cards. Depending on your situation, one of these might help you earn a few extra perks when you use your card. For instance, you might be able to use cash back rewards toward paying your bill. 

While credit cards are a great way to build your credit, the key is to not let spending get out of control. 

Final thoughts on credit

There is a lot of misinformation when it comes to credit scores. Here is some information to consider when making decisions about your credit report.

Contrary to popular belief, a bad credit score does not necessarily take forever to improve. Improving your credit score, however, will likely require a diligent effort on your part. For this reason, it's important to use your credit score number as a launching point in which to begin to rebuild your FICO score. Begin monitoring your credit report, disputing discrepancies, and gradually changing the way you handle credit. You may be pleasantly surprised at how quickly your score can begin to improve.

Many believe that evaluation of your credit score is an invasion of privacy. A credit inquiry reveals to lenders how risk-worthy you are with the money/credit they are willing to lend to you. According to FICO, your credit report and score is evaluated on the same information that lenders already look at, such as a credit bureau report, credit application and/or your bank file. A credit score is simply a numeric summary of that information.

If you're struggling with managing your credit, you might want to seek professional help. The National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies may be able to assist you, for free, in many cases. Something else to consider is credit life or disability insurance. If you pass away or become disabled and have high levels of credit card debt that you can't pay, this insurance can help provide an additional safety net. With it, your loved ones could avoid having to pay off the covered debt. Building and maintaining good credit doesn’t have to be complex. With the right approach and smart decision making, you’ll be well on your way to good credit. 


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