How Do You Build Good Credit?
What’s the best way to build credit?
Making on-time payments and keeping debt low are key to building credit.
Getting a student or secured credit card can help you build credit history if you have no credit history.
Reviewing your credit reports can help you spot inaccuracies or fraudulent activity that may hurt your credit.
Your credit history matters, whether you’re getting a credit card or buying a home. And understanding how to build credit can give you the confidence you need to broaden your financial opportunities.
Your credit history is the record of your borrowing and repayment activity over time, reported by your lenders to the credit bureaus and recorded in your credit report. Your credit score is a three-digit number (usually between 300 and 850) that quantifies the information in your credit report and indicates to lenders how likely you are to repay what you borrow. A good credit score can help you qualify for higher credit limits and lower interest rates. A low credit score has the opposite effect. So what can you do to ensure your credit health? Here are some tips to get you started:
Five financial factors that impact your credit history
To build or rebuild your credit, you can start by addressing the five core categories influencing your credit report and score: payment history, amounts owed, length of credit history, new credit, and credit mix. Each weighs differently on your score. That means some financial behaviors impact your credit more than others. Learn just where to focus your efforts.
- Payment history (35% of your credit score): Your payment history shows how often you’ve paid your bills late or on time. Consistent, timely payments will help your score. Late or missed payments can dramatically hurt your score. Consider setting up automatic payments to ensure you never miss a due date.
- Amounts owed (30% of your credit score): Your credit utilization is the total amount of debt you owe across all your credit accounts. You can measure your credit utilization by dividing your total amounts owed by your total available credit, also called your credit utilization ratio. Keeping your credit utilization lower can make you more appealing to lenders. Getting in the habit of paying your balances in full (or as close as possible) each month can help with managing your credit utilization. Try budgeting with a mobile app or set spending alerts to track how much you’re charging.
- Length of credit history (15% of your credit score): Lenders look at how long you’ve had your credit accounts. The longer you’ve had your accounts open and in good standing, the more it can help your score. Closing an account eventually removes it from your credit history, so keeping your oldest accounts open can help your score, and closing an old credit account may negatively impact your credit.
- New credit (10% of your credit score): When lenders look at your credit report, it shows up on your report as an inquiry and can stay on your file for two years. Making too many inquiries or opening too many new accounts back-to-back can signal risk. Be mindful of when and how often you apply for new credit accounts.
- Credit mix (10% of your credit score): The combination of your different types of credit accounts is your credit mix. It’s generally good to have both revolving credit (like credit cards) and installment loans (like a mortgage or auto loan). Having experience with different types of credit shows lenders you’re no stranger to responsibility. Consider how to diversify your credit accounts to improve your mix.
How to build credit with a credit card
Did you know?
If you’re looking to build credit history, having a credit card can help. Using any credit card responsibly (keeping balances low and making payments on time) can positively impact your credit score. But if you need to establish your credit history or rebuild your credit, there are cards explicitly geared toward helping you build and improve your credit: secured and student credit cards.
These cards often come with a lower spending limit and a higher interest rate, but also provide an opportunity to demonstrate responsible use, showing lenders you’re capable of handling debt while opening yourself up to more borrowing options down the road.
- Secured credit card: With a secured credit card, you provide a security deposit equal to the credit limit your card issuer approves. Your deposit acts as collateral if you can’t pay back what you owe on the card. Aside from the deposit, a secured credit card works like a standard credit card; you can make purchases within your spending limit and may even earn cash back rewards on eligible purchases. A secured credit card also provides a direct line to unsecured credit; with several on-time payments, you can get your deposit back and graduate to a regular credit card.
- Student credit card: If you’re in college and want to build a credit history without a security deposit, consider a student credit card that tailors qualifications toward the unique needs of students. For example, you can apply for most student credit cards without a credit score, and many have more flexible income requirements.
- Authorized users: If you can’t qualify for a secured or student credit card, you can still build credit by becoming an authorized user on someone else’s account. And while you won’t have an account in your name, you will get a credit card you can use for purchases. You can build credit history if you and the primary cardholder use the card responsibly.
Get your credit report and check for errors
Part of building excellent credit is tracking your progress. Checking your credit report can show you how you’re doing and making sure the information on your report is accurate can help you avoid unwarranted hits to your credit.
Everyone is entitled to a free yearly credit report from the three major credit reporting agencies (Equifax, Experian, and TransUnion). You can request a copy of your credit report at annualcreditreport.com. Through December 2023, you can also get a free weekly credit report from each credit bureau.
Check for inaccuracies, especially in balances or payment history. You have the right to challenge any information you believe to be inaccurate in your report. You can file a dispute with the credit bureau directly or contact the creditor in question and ask them to investigate and correct it. If they can’t verify that the information is accurate, they’re bound by law to remove it. By resolving these issues quickly, you can stay on top of your credit score.
Building credit may seem overwhelming, but you can do it successfully using the practical strategies outlined here. Get started today on your journey to a good credit score.
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