How Do I Build My Credit?

The difference between having a good credit score and a great one can have a major impact on your finances. Having a higher credit score can make you more attractive to a lender, scoring you financial perks like better loan terms, lower interest rates and more enticing credit card rewards. 

So, with all these benefits on the line, you might be wondering, “How do I build my credit?” 

The good news is, there are a number of ways to build your credit and improve your credit score. Here’s how. 

Check your credit report

Your credit report might be hurting your score — and you might not even know it. 

A Federal Trade Commission study revealed that one in four consumers identified errors on their credit reports that might affect their credit scores. 

Faulty information can appear on any or all of your credit reports (you have three), so it’s essential you check all your reports regularly from the major credit bureaus (Experian, Transunion and Equifax). You can get your reports at AnnualCreditReport.com. If you do find a problem, you’ll want to dispute it directly with the credit reporting agency. They're required to investigate and remove any inaccurate information, usually within 30 days. 

Also review the personal data listed — name, address and so on. Check each of the records on your loans and lines of credit. Are your accounts all listed there? Is there any inaccurate reporting of late payments on those accounts? Does anything else seem off? 

Keep in mind that bad information on a credit report might be a simple mistake. But it could also indicate fraud. Watch out for accounts you never opened or other suspicious data. If you suspect identity theft, take immediate action to stop and repair the damage. 

Minimize your ratios

There are two important ratios when it comes to your credit. 

First is your debt-to-income (DTI) ratio. To calculate this figure, add up your recurring monthly debts — mortgage payments, student loan payments, credit card minimum payments, etc. Then divide by your gross (pre-tax) monthly income. 

Your DTI ratio doesn’t actually impact your credit score, but it does affect whether lenders will approve your loan applications. It’s a good idea to keep your DTI ratio under 30 percent. (Under 20 percent is considered ideal).  

The second important number is your credit utilization ratio, or the percentage of your available credit limit that you’re actually using. This applies to all revolving debt — credit cards, personal loans or other similar loans. So, if your credit cards have a collective limit of $10,000 and you have a total balance of $2,000, your credit utilization ratio is 20 percent. 

Unlike your DTI ratio, credit utilization plays a major role in determining your credit score. Once your ratio inches above 30 percent, you’ll usually start seeing a drop in your credit score. 

To keep your credit utilization ratio healthy, minimize your credit card balance whenever possible: 

• Keep ahead of debt. Pay more than your minimums each month, and pay in full if possible. 
• Slash existing debt. Get going with an accelerated repayment strategy. 
• Pay your bills twice a month. You’ll keep your balance from creeping too high by the month’s end. 
• Aim higher. If your creditor offers you a higher limit, take it ... but don’t use it. The higher limit will lower your credit utilization ratio if you keep your spending patterns the same or less. 

Don't open or close lines of credit 

Did you know that closing one of your credit cards can actually lower your score? 

Credit scoring models value the time you’ve held on to credit, so closing an older card can reduce the age of your credit history and decrease your score. And closing any card will reduce your available credit limit, lowering your credit utilization ratio. 

Then there’s the issue of seeking new credit. 

Adding a card or opening a loan typically prompts what’s called a hard credit inquiry during the application process. A single inquiry will usually dock you just a few credit score points and only temporarily. But, if you repeatedly apply for new credit or open several credit lines at once, you’ll probably see a more severe drop in your score. 

So, especially if you’re on the verge of applying for a big loan, steer clear of new credit applications. And keep those old accounts open if they’re not costing you an annual fee. You’ll protect your score from unnecessary movement. 

Pay bills on time

Life happens, and you might have missed a payment due date here and there. No biggie, right? Well, your payment history — how timely you are on your bill payments — is the No. 1 contributing factor when it comes to a good credit score. 

Typically, when you’re 30 days late, your creditor will report your delinquency to the three credit bureaus. And that black mark can have a surprising impact: records show that people with an average score can easily see a 60- to 80-point decrease after a single 30-day-late payment. 

So, put systems in place to ensure you pay each of your bills on time going forward. Consider setting up automatic bill payment or, if you’d rather pay your bills manually, create an alert on your calendar to remind you each month.