Your credit score can affect many aspects of your life—from getting a loan to getting a job or getting a house. Good credit is necessary for sound finances and many major purchases. But there are no quick fixes or shortcuts to building good credit. You must start by establishing credit, then embrace responsible credit habits over time. This helps you create a record that shows lenders you’re a low risk and a desirable customer.
The following tips for building your credit help you understand and improve on the key factors that the three major credit bureaus use to calculate your credit score. By following these smart financial guidelines, you can demonstrate your credit worthiness. That makes you a more desirable customer and borrower for many businesses and lenders.
1. Review Your Credit Report
In order to build your credit, you have to understand it. Start by regularly reviewing your credit reports. You can request your free annual credit report from each of the three credit bureaus and assess your credit as it stands right now. Review the following:
- Payment history
- Amount of credit you’re using
- Credit age
- Mix of credit account types
- Credit inquiries
Our free Credit Report Card can help you understand what is in your credit report and how those things affect your credit score. Our report card will help you identify areas that need improvement and help you make a plan to address these issues.
2. Dispute Errors and Inaccuracies
As you review your reports, keep an eye out for any errors. Credit report errors are not uncommon. In fact, a Fair Credit Reporting study found that one in four consumers found mistakes on their reports that can hurt their scores. You have the right to dispute those errors and fix your credit report. You can do credit repair on your own or hire a credit repair company to help you.
3. Keep Credit Accounts Open and In Good Standing
If you already have available credit, keep the accounts open. Older credit accounts help assign a credit age, which makes up 15% of your score. Closing an old account makes it look like you didn’t start establishing credit until later, which can lower your credit score.
And if you close a credit card, you also lose valuable available credit for your utilization rate. It may be better to keep the card open to support a lower debt-to-credit ratio—just don’t run up the balance. Make small purchases two to three times per year and pay them off during the following billing cycle.
4. Make On-Time Payments
Making on-time payments is one of the most important things you can do to build your credit. Your payment history accounts for 35% of your credit score. It tells lenders and potential employers how reliable you are. Missed payments are serious signs of trouble. Charge offs and defaulted accounts say you can’t be trusted to repay your debts as promised.
If you are newly establishing credit, avoid late payments and other poor payment habits. This is one of the two most impactful factors for building good credit. If you already have a poor payment history, commit to changing now. Over time, those old payments will have less impact. Eventually, they’ll even fall off your report.
5. Use a Maximum of 30% of the Credit Available to You
Ironically, lenders would rather not give you credit if it looks like you need it or you like using it too much. That may seem counterproductive, since they make their money off loan interest and fees. But using too much of your available credit is a warning sign.
Maxing out your cards and lines of credit may point to problems with spending, debt and income. That worries creditors, since it means you may stop paying your loans. That’s why your utilization rate is a vital part of your credit score—accounting for 30% of the calculation in most scoring models.
The most desirable utilization rate is less than 10% of your available credit. At most, keep it under 30%. If you make any large purchases on your revolving credit accounts, pay them off as quickly as possible to keep your utilization rate low.
6. Open Different Types of Credit Accounts
Having a mix of credit types is a good demonstration of creditworthiness. This factor contributes 10% to your credit score. There are three types of credit accounts to consider:
- Revolving accounts—credit cards and lines of credit. They have a credit limit and require regular payments.
- Installment accounts—student loans, car loans, mortgages and personal loans. The lender provides a lump sum, and you make payments until the debt is paid off.
- Open credit—charge cards, utilities and cellphone services. With charge cards, you have a credit limit, and you can make purchases and cash advances, but you don’t carry a balance. With open credit accounts, you need to pay off your charges each month.
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To build credit, work toward maintaining an account from each of these categories—as long as you can afford them.
7. Open a Secured Line of Credit
It may be difficult to build credit if you haven’t established a credit history yet. If you have poor or fair credit, it may also be hard to get approval for traditional credit cards or loans. However, secured lines of credit—like secured credit cards and secured personal loans—can help you get started on your path to good credit.
To get a secure line of credit, you will need to put up some form of collateral—usually cash, a savings account, or other personal property. With this credit option, you may get a decent interest rate. The lender’s risk is lowered due to your secured asset. This means they don’t need to charge a much higher interest rate, as is common with poor credit.
8. Limit Credit Inquiries
Be careful when applying for new credit. You don’t want more than two hard inquiries every six months or so. Too many requests for credit can look bad to potential lenders. These inquiries account for 10% of your score. Only apply for credit if it can help improve your score through one of the methods discussed above or is necessary for making a large purchase such as a home or car.
When you do apply, comparison shop. Carefully weigh all the terms and the chances that you will qualify for the card or loan on offer. Then, choose only one or two and apply. If you’re turned down, don’t try again for at least six months.
Build Your Credit
These personal tips can help you build credit and work on improving poor or fair credit. Building good credit habits can have a bit impact on your credit score. Start by signing up for Credit.com’s free Credit Report Card to get personalized advice for your unique credit situation.