How to Build Your Credit

Good credit isn’t just a nice thing to have – it’s essential. In this guide to understanding your credit score, you’ll learn how to build credit over time. Whether you need to establish credit or repair bad credit, these simple tips will show you how you can move toward top notch scores.

Your credit rating explained
What does having “good credit” really mean? To get a better idea of what makes a good or bad credit score, you have to know how the credit reporting agencies determine that score.

Your credit score is based on five different factors:

• Payment history: a record of whether or not you pay your bills on time. Late payments and repeated delinquencies can lower your rating.
• Credit utilization: a ratio showing how much total credit you have available to you versus how much you actually use. Credit reporting agencies will regard you more favorably if you use less than 30 percent of your available credit on a monthly basis.
• Types of credit used: a history of mortgages, credit cards, car loans, and various other types of credit. It’s best to have a mix of these types to build a better credit score.
• Number and type of recently-opened accounts.
• The length of your credit history.

You should know that these factors don’t all carry equal weight. According the Fair Isaac Corporation (the bureau that calculates FICO scores), payment history and credit utilization count much more than other factors. Consequently, if you really want to build your credit over time, you should concentrate on paying your bills on time and using a smaller percentage of your available credit. Consumers who do these things are rewarded with the best credit scores.

If you pay your bills on time, pay off your full credit card balance each month, and use just 10 percent of your available credit, you might be able to achieve an 800 credit score. 800 is near-perfect and represents the top tier of credit scores. Scores in the 720, and higher, range represent very good credit, and consumers with that kind of score get the best interest rates. 640 and up is considered “fair.” Anything less than that is considered “bad” credit.

How to build your credit over time
When it comes to repairing or establishing credit, the process takes time. That’s why the Federal Trade Commission warns Americans to steer clear of scam services that promise to erase bad credit for a fee. The only way to build good credit is to follow a few simple tips:

• Know where you stand. Get a free copy of your credit report and report any errors to the credit bureau.
• Get a major credit card, if you don’t have one. Having a Visa, American Express, Mastercard, or Discover card can help you build credit.
• Set up automatic payments so you always pay your bills on time.
• Never let payment disputes go to collections, if possible.
• Pay down debt and spread it out. It’s better to carry small balances on several credit cards than to have a huge balance on one card.
• Don’t let cards go inactive. You can build credit by keeping your accounts active.
• Use a lower percentage of your available credit. Using less than 30 percent is good — less than 10 percent is even better. If you need to use more than that, spread your purchases out over several cards or ask your card issuer to raise your limit.

The lower your credit score, the longer it will take you to build good credit. But no matter how impossible it might seem, improving your credit score is possible. With discipline, most any careful credit user could reach the 700 mark.