How to Build Credit
Introduction
Whether you have great credit, bad credit, or you’re somewhere in between, the principles you must follow to build your credit are generally the same. Improvement takes time, but if you follow best practices, you can create a strong credit history that will help you access the financial products and services you want. Attaining better credit doesn’t have to be complicated. Here’s how to build credit.
Understand the Basics of Credit
Before you begin, it’s helpful to understand the basics. In simple terms, your credit is comprised of information about your history of managing debt and making payments. When you apply for a financial product such as a loan or credit card, the company will pull your credit to assess your risk. Rental applications and job applications may also run your credit.
Key Factors in Credit Evaluation
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Credit Report: Contains information about your history of managing debt. The three major credit bureaus (Experian, Equifax, and TransUnion) each have their version of your credit report. The report includes your current and past debts, credit applications, account standings, and negative items such as late payments or bankruptcies.
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Credit Score: A numerical grade calculated based on the information on your credit report. FICO and VantageScore are the most popular scoring models. Credit scores range from 300 to 850, with higher numbers representing stronger credit.
Image Description: Illustration explaining the basics of credit reports and credit scores.
Open a Credit Account
The fundamental way to build credit is to demonstrate over time that you can successfully manage debt. To do this, you will need to open a credit account such as a credit card or loan.
For Credit Beginners
- Student Credit Cards: Low credit limits and sometimes offer rewards like cash back and incentives for maintaining a good GPA.
- Secured Credit Cards: Require a security deposit that establishes your credit limit but otherwise operate like a traditional card.
For Those with Established Credit
- Improving Credit Mix: Adding another type of credit such as a mortgage, auto loan, or student loan can boost your credit score and demonstrate your capability to handle more than one type of debt.
Image Description: Infographic showing types of credit accounts for beginners and those with established credit.
Pay Your Bills on Time
Payment history is the single most important factor in building credit, making up 35% of your credit score. Paying your bills on time and in full each month is the best way to maintain healthy credit.
Importance of Payment History
- Timely Payments: Includes all credit card and loan payments appearing on your credit report.
- Late Payments: Can appear on your credit report once they’re 30 days past due and include negative items like accounts in collections, bankruptcies, and court judgments.
Image Description: Illustration highlighting the importance of paying bills on time.
Maintain a Low Credit Utilization
Revolving credit accounts, such as credit cards, are characterized by credit limits and fluctuating payments based on your balance. To build credit, stay far away from the credit limit and keep your overall utilization low.
Credit Utilization Tips
- Stay Below 30%: Aim to keep your balance below 30% of your available credit limit.
- Pay Off Balances: The best way to use a credit card is to pay off your entire balance each month to avoid interest charges and keep utilization low.
Image Description: Infographic explaining how to maintain low credit utilization.
Check Your Credit Report
The information in your credit report dictates your credit score and determines your creditworthiness. Always know what’s inside your credit report.
Steps to Check Your Credit Report
- Request Free Copies: Get free copies of your credit report from all three credit bureaus once a year.
- Dispute Inaccuracies: Dispute any mistakes in your report to get them removed.
- Monitor for Identity Theft: Ensure there are no accounts you didn’t open or other inaccuracies that could indicate identity theft.
Image Description: Illustration showing the steps to check and understand your credit report.
Play the Waiting Game
Time is an important factor in building your credit. The longer your history of making on-time payments on your credit accounts, the stronger your credit will be.
Tips for Long-Term Credit Building
- Keep Old Accounts Open: This maximizes the length of your credit history.
- Impact of Negative Items: The impact of negative items will lessen over time and most will fall off your report after seven years.
Image Description: Infographic showing the importance of time in building credit.