How to Build Credit

ATM CardGood credit can make it easier for you to get approved for things like a credit card, car loan, mortgage, or even an apartment lease or job. It can also help you qualify for lower interest rates on the money you borrow and reduce insurance premiums.

So what exactly does "good credit" mean, and how can you get it and hold on to it?

Understanding your credit score

Your credit score indicates how much financial risk you pose to companies thinking of doing business with you. At each credit reporting agency, your FICO score is based on the agency's credit report on you, with the report providing current and past data on your use of credit and your financial reliability. The data is grouped into five categories, and each category is weighted in terms of its relative importance in determining your FICO score.

Know your FICO scores

Image: credit risk meter

A FICO score falls somewhere in the range of 300 points (worst) to 850 points (best).

Everyone has three FICO scores, one from each nationwide credit reporting agency (CRA):

  • Equifax
  • Experian
  • TransUnion

Credit Score
What it's ConsideredWhat it Means
770 to 850Very Good / ExcellentBest credit/interest rates are usually available.
Above 700GoodYou'll most always be approved for loans with very good interest rates.
Mid-600s to 700AcceptableYou'll most likely receive credit, but not receive the best interest rates.
550 to mid-600sSubprimeVery hard to get a loan. If approved, you will have higher interest rates and penalty fees.
300 to 550PoorGenerally leads to a rejection of credit.

Image: elements of credit score 

Stay on top of your scores and reports

Under federal law, you're entitled to get a free copy of your credit report from each nationwide CRA:

  • Every 12 months
  • Whenever you're denied a credit card or loan
  • When you find an error on one of your credit reports

To order a free credit report, go to annualcreditreport.com - a site sponsored by Equifax, Experian and TransUnion. According to the Federal Trade Commission, this site is the only authorized source for the free annual credit report available to you by law from each nationwide CRA.

Also, if you're ever denied a credit card or loan, you have the right to get a free report from the CRA used by the lender. Typically, the lender will provide instructions on how to get your report in such an instance.

Here's the contact information for each CRA:

Equifax
ExperianTransUnion
equifax.comexperian.comtransunion.com
1-800- 685-11111-888-397-37421-800-916-8800
P.O. Box 740241
Atlanta, GA 30374
P.O. Box 2104
Allen, TX 75013
P.O. Box 1000
Chester, PA 19022


Your credit reports don't show FICO scores, although you can get your scores separately (and typically for a fee). When ordering one of your reports at annualcreditreport.com, look for a link for getting your FICO score from the CRA behind the report you're ordering. You can also purchase any of your FICO scores at myFICO.com.

You should consider checking one of your FICO scores each year, ordering it from a different CRA each time. Also, think about checking at least one of your scores (and perhaps the report it was based on) before applying for a new job or large loan. You can ask the potential employer or lender which CRA it uses in screening applicants.

Checking your scores is an easy way to find out what, if anything, you may need to do to improve your standing and it helps keep you in control of your financial well-being.

More tips

Beyond staying on top of your credit reports and scores, there are several more things you can do to get and help keep your credit in good shape.

  • Pay bills on time. If you've missed payments, try to get current and stay that way. If you’re having cash flow problems, get in touch with your creditors and explain your situation. They might be willing to work on a solution with you.
  • Reduce debt. Create a budget as a tool for spending less and paying down debt, focusing first on reducing high-interest credit card balances. Try to keep these balances low compared to your credit limits.
  • Pay off your credit card balances in full each month. Get into a habit of charging no more than what you can afford and then try to pay off your balances in full each month. This can demonstrate to businesses that you're a good credit risk and improve your FICO scores.
  • Keep older credit card accounts open. Older accounts lengthen your credit history, which is good for your FICO scores. Opening a lot of new accounts can lower your scores.
  • Maintain a good mix of credit. An assortment of different types of revolving credit, including credit cards and installment loans, can help drive up your scores.
  • Limit "hard inquiries" on your credit reports. Whenever a business checks one of your credit reports because you applied for a credit card, loan or other service, a "hard inquiry" is recorded in your files. Too many hard inquiries can harm your FICO scores. A "soft inquiry" occurs when your report is checked for other reasons like when a business is deciding whether to pre-approve you for a credit card, or when you check your own report. Soft inquiries will not affect your FICO scores.
  • If you’ve had credit problems, work on building a new credit history. By opening new accounts and keeping current on the payments, you should eventually be able to raise your scores.

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