In today’s world, your credit history impacts more areas of your life than you probably realize.
Great credit can open doors to the best mortgages and student loans, low-interest credit cards with enticing perks, competitive insurance rates, and even sought-after jobs.
Fortunately, creating that solid credit history is within your power. You can learn how to build credit, how to rebuild credit after financial trouble, and how to improve your credit score. By consistently applying some basic principles, you’ll earn an enviable financial reputation. Here’s how:
1. Choose your strategy carefully.
Responsible use of a credit card is one way to start building credit. And it might be the best approach for you. But it’s not the only path.
What if you can’t get a card? Or the cards for which you qualify have low limits and bad terms? What if you don’t believe you can carry a card without overspending?
A straightforward alternative for creating an impressive credit history is a loan. In fact, if you have a loan right now, you’re already establishing your credit history. Student loans, mortgages, car loans, HELOCs, and many other types of loans appear on your credit report.
Or you can get proactive in building credit. Consider taking out a credit-builder loan. These small loans give you the opportunity to establish a solid payment history that’s reported to the credit bureaus. Or sign up for a service that reports your rent payments to the credit bureaus.
2. Start with the right card.
If you opt to use a card to build credit, select wisely. Remember: A debit card won’t affect your credit history, but a credit card will. When choosing yours, look for a credit card with a low-interest rate, no annual fee, and maybe even some perks (like cash back or travel rewards).
If you don’t yet qualify for a traditional credit card of your own, see if your parent or spouse is willing to add you as an authorized user on their card. Or look into getting a secured card, which requires you to provide money upfront to guarantee payment on the card.
Most card issuers do report activity for secondary card users and secured cardholders to credit bureaus. So you’ll start to build your history when you use your card. And, after using that card responsibly for several months, you may begin to qualify for traditional (unsecured) cards that require no alternate primary user or upfront cash.
3. Stick to your due dates.
The way you pay your debt can make or break your credit score. In fact, 35% of your FICO score depends on how timely you are in making loans and credit card payments.
Even a single late payment can seriously sour your credit score, causing a drop as high as 110 points. So it’s essential to your credit health that you make prompt payment a priority for every loan and credit line you carry.
4. Stay far away from your card’s maximum.
A common misconception about credit is that using more of the credit available to you will translate to a higher score. But following that advice that will actually hurt your score.
It comes down to your credit utilization ratio. That’s the portion of credit available to you that you’re actually using — the amount you’ve borrowed or charged, divided by your total credit limit.
That measure of debt accounts for nearly one-third of your FICO score. And, once your credit utilization ratio inches past just 30%, your score will start to dip. In fact, people with the very highest credit scores have a ratio of only about 7%.
So keep your ratio as low as possible. Borrow or charge less to your cards. Amp up your spending limits . . . without touching that available credit. Or commit to paying down debt faster or with more frequent payments.
5. Lower your interest rates.
If you’re like most Americans, your debt is more than just the amount you’ve borrowed. It also includes the interest charges you’ve accumulated on your loans and cards.
But one surefire way to keep debt from snowballing is to slash interest rates wherever you can. First, research loans and credit cards carefully to choose those with the most favorable terms.
Then, keep an eye out for sweeter deals over time. As your credit improves, you may have the opportunity to access even better cards or loans. Refinance your loans or transfer your card balances when it makes sense to do so.
6. Review your credit regularly.
Knowing where you stand is powerful. Many credit cards now provide a free peek at your credit score, updated each month. And those reports often highlight the factors that are hurting your score the most. If you focus on changing those factors, your efforts can have a significant impact on your score going forward.
But your score tells you only so much. To view the elements that go into the making of your score, you need to view your credit history report. By law, you’re entitled to three free credit reports every year — one from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Study each of them carefully to get a full picture of your credit.
7. Fix mistakes on your credit history report.
Many people assume that their credit reports accurately reflect their financial histories. But, according to the FTC, 25% of Americans have at least one error on their credit reports. Fortunately, the Fair Credit Reporting Act requires credit bureaus to fix errors promptly.
Where should you look for mistakes? Start with the basics — names you’ve used, addresses, and personal information. Then review the list of your credit accounts, records of payment history, and details of bankruptcies or debts in collection. If you spot something amiss on your report, notify the reporting company right away.
8. Protect yourself against identity theft.
In 2018, 14.4 million people fell victim to identity theft. Accounts were illegally opened in their names, tax refunds were claimed on their behalf, or their credit cards saw unapproved charges.
Luckily, spotting problems early can give you a leg up in containing the damage. Contact your credit bureau if you suspect fraudulent activity when viewing your credit report.
And follow the FTC’s guidelines for protecting yourself. Steps may include placing a fraud alert on your credit, requesting a new number for your credit card, strengthening your financial account passwords, reviewing your billing statements and credit reports more frequently, and possibly working with a credit monitoring company.
9. Keep open your old lines of credit, if possible.
Building a solid credit history does take time. But time works to your advantage. That 30-year mortgage, those old credit cards, and that student loan you’re paying off — all of them provide years of evidence that you’re trustworthy when it comes to money.
And your FICO score reflects that time with 15% of your score based on the age of your credit. The higher the average age of your open credit lines, the higher your score tends to be.
So think twice before shutting down an older card or line of credit. If you can keep it open (without shelling out an annual fee), your credit history will be even better.
10. Minimize applications for new credit.
Since older cards can boost your score, brand new cards can have the opposite effect. Applying for a new credit card or loan may cause just a brief dip in your credit score. But applying for lots of new credit or over a long period of time can have a more significant impact.
Plus, the more new cards you have, the lower your average credit card age. And that lowers your score as well.
What should you do? Apply for new credit strategically — when it makes sense to take out a loan, when you’re ready to transfer a balance to a low-interest card, or when you’re prepared to upgrade to a card with better terms or rewards.
11. Watch your credit mistakes disappear.
Maybe you’ve had your share of financial slip-ups. And your credit report highlights them in black and white. But it won’t feature your past mistakes forever.
Given enough time, even your worst credit mistakes eventually fall off your credit report. Late payments will be gone within seven years, as will foreclosures and reports of accounts sent to collections. Bankruptcies stick around the longest, but even those will be wiped off after 10 years.
And the steps you take now will outweigh those old mistakes as you commit to responsible credit habits month after month. Stick with your plan to build or rebuild your credit, and you will see increasing results over time.
Excellent credit doesn’t have to be mysterious or elusive. With the right action steps, anyone can create a great credit history, improve their credit score, and step closer to being more confident and in control of their financial future.