Building credit can help you access financial opportunities like credit cards, mortgages and unsecured loans. It starts with understanding how credit works. Then, you can find credit-building options that work for you.
Whether you’re new to credit, rebuilding credit or just want to know more about which factors impact your credit score, here are some tips to help you build credit.
What does it mean to build credit?
When people talk about building credit, they may be talking about a range of strategies you can use to improve your credit score. Generally, it means that when creditors give you access to credit through a loan or credit card, you use that credit responsibly and make your minimum payments consistently and on time. This responsible credit usage may then be recorded on your credit report and have a positive effect on your credit score.
Step 1: Understand your credit report and credit score
Your credit report is a document that collects information on your credit activity and history. A credit report may include information about past and current credit accounts, credit inquiries, missed or defaulted loan payments, personal data and public records like bankruptcies and foreclosures.
Credit scores are designed to help lenders predict the likelihood of you repaying a loan based on the information found in your credit report. However, different lenders may use different credit scoring models, which may change in how they weigh factors found in your credit report.
This means that your credit score may vary from model to model. In general, the higher your credit score, the better. Understanding how these credit scoring models work can help you build and raise your credit score.
To give you an idea of what this may look like, let’s look at the widely used FICO® Score and see how each category may impact your credit score:
Payment history: approximately 35%
Your payment history makes up a large portion of your FICO® Score, and for good reason – it lets lenders know whether you have a record of paying your debts on time.
Amounts owed: approximately 30%
Your FICO® Score considers your credit utilization rate, which is calculated by dividing the total amount of credit you’re using by your total available credit. The lower your utilization, the better. Using a high percentage of your available credit can be a red flag for lenders.
Length of credit history: approximately 15%
FICO® Scores account for credit history in several ways, including the age of your oldest account, age of your newest account and average age of accounts.
New credit: approximately 10%
New credit includes the number of hard inquiries on your account. Hard inquiries generally happen when you apply for new credit and may typically impact your FICO Score for 12 months. If you apply for new credit frequently, credit companies may view you as a riskier borrower.
Credit mix: approximately 10%
Your credit mix considers the types of credit you’re using. For example, you might have a mortgage, credit card and personal loan. A diverse credit mix can indicate to a lender that you’re adept at managing different types of debt.
Check your credit report frequently
You can request a free credit report from each major credit bureau once every 12 months at annualcreditreport.com. The 3 major credit bureaus also offer free weekly credit reports. When reviewing your credit reports, look for errors and indicators of fraud, as well as areas where you can improve.
Step 2: Learn how credit cards work – and how they can work for you
Understanding how credit cards work can help you take advantage of their benefits.
If you don't have a credit card, getting one can be a good way to start building credit. If you have little or no credit history, a secured card may be more accessible and pave the way to a traditional credit card. Here are some other ways you can make credit cards work for you:
