Want to build up to a good credit score? Know these seven basic moves and you’re guaranteed to have one.
Good credit is like money in the bank.
Even if you never use it, it makes life a lot easier. Good credit gets you access to homes, cars, insurance and banking services at the very best rates.
And if you never borrow a dime, bad credit can haunt you. Everyone from landlords to banks and insurance companies to some potential employers run credit checks.
Here are seven tips to build a good credit history (or shine up one that may have gotten a little tarnished).
How to build credit with a credit card
- Request a copy of your credit report.
- Show responsible credit behavior.
- Read and understand your cards’ terms and conditions.
- Read your monthly statements carefully.
- Pay down – or pay off – your balances.
- Use cards that match your spending habits.
- Think twice before canceling cards.
The nationwide consumer credit bureaus – Experian, Equifax and TransUnion – create a credit report based on your credit history, payment habits and amount of times companies inquire about you. This information is then crunched into a three-digit credit score.
You’re entitled to a free credit report each year from each of the nationwide consumer credit bureaus thanks to the Fair Credit Reporting Act. Access the reports via the three agencies’ jointly run website, AnnualCreditReport.com. You can also get a free credit report and score at our sister company, Bankrate.
With banks, credit cards and financial apps providing credit scores – not to mention the prevalence of credit monitoring services – it can be tempting to skip pulling your actual credit histories. But that’s like saying if you take your temperature, you don’t have to get a check-up.
“A credit score is a good indication of your overall credit health, but it doesn’t have all the detailed information that your credit report does,” says Amy Thomann, head of consumer credit education at TransUnion.
“It’s always good practice to review your entire credit report to make sure the information is accurate and that there is no suspicious activity being reported,” she adds. “If you do see something you think is inaccurate, you can dispute it with the appropriate credit reporting agency.”
See related:5 key federal laws that help credit card holders
Each credit bureau has its own criteria for calculating credit scores, which often results in different credit scores depending on where you look. But the best way to improve all of your credit scores is to show responsible financial behavior for an extended period of time.
And those formulas for good credit are pretty simple:
- Paying bills on time every time.
- Using just a small percentage of your available credit – even when you pay it off in full each month.
- Successfully managing a mix of credit types, such as open-ended accounts (like credit cards), and close-ended accounts, (like loans).
- Keeping requests for new credit to a minimum. (They can impact your score for a year.)
- Maintaining long-standing relationship with creditors. (Scoring formulas like to see older accounts on your history.)
And if you don’t have much in the way of traditional credit (cards and loans), investigate whether potential lenders can use alternative data (rent payments, phone bills, utility bills) to augment your credit history.
Another option: Experian Boost. You give the credit bureau access to your checking account transactions, and it gives you credit for recurring on-time payments. If you’ve been responsible with bills, you can see an improvement in your Experian credit score.
No one wants to suint at the fine print, but it contains all the important information about payment terms, interest rates, annual fees and penalties. Your credit card contract – also called a card agreement or “terms and conditions” – spells it out, though it’s not exactly the feel-good read of the year.
“While there is a greater general understanding of credit cards and how they work, most people are overwhelmed by the terms and conditions associated with the credit card agreements,” says Bruce McClary, vice president of marketing for the National Association for Credit Counseling.
“Reading is one thing, but understanding is equally important,” he adds. “Overlooking or misunderstanding a single clause buried in a sea of legalese could cost you in the long run.”
Need a translator for the credit jargon or legalese? Chat with a credit counselor associated with the NFCC or the Financial Counseling Association of America.
“Beyond the obvious language about interest rates, fees, reward point guidelines, and restrictions, examine what factors could lead to changes in the terms,” McClary says. “For example, missed payments could lead to an increase in the interest rate as well as extra fees. Paying late may also put earned rewards in jeopardy.”
Because of that, it’s “a good idea to be familiar with the billing cycle and any expectations related to what is considered a timely payment,” he says.
Another great tool for consumers: the Consumer Financial Protection Bureau’s database of cardholder agreements. It “allows people ample opportunity to read and understand the terms before committing to anything,” says McClary.
See related: Credit card agreement: Find yours online
The Credit CARD Act of 2009, has made bank statements more reader-friendly.
Want to know the real price rolling that balance? Check out the Schumer box on your bill.
“Everything in the Schumer box is important for knowing how long it will take to pay off your balance and what it’s costing to carry it from month to month,” says McClary.
And if something doesn’t make sense, call your credit card company or a credit counseling agency accredited by the NFCC or the FCAA to ask questions.
See related:Making sense of confusing credit card statements
When it comes to paying off credit card balances, avoid making new charges and focus on paying off the cards.
Two ways to attack it:
Throw the most at the card with the highest interest rate.
Or, if meeting smaller goals keeps you motivated, pay off the smallest balance first.
Either way, the trick is to start throwing extra dollars at those bills the minute you realize it’s getting out of control. “Pay more than the minimum monthly payment and consider the possibility of negotiating better terms,” says McClary.
Choosing the right card at checkout can save you a bundle, according to Russell Wild, a fee-only financial advisor, NAPFA associate, and co-author of One Year to An Organized Financial Life.
Consider the payment terms, he says, “most notably the interest rate you’ll pay if you don’t pay off your debt at the end of the month.”
If you don’t pay off your balances at the end of the month, get a card that has a lower interest rate, rather than one with good rewards.
Wild also suggests using caution with store cards, especially those promising zero interest. If you’re late making payments, interest rates can skyrocket, which is an expensive mistake.
Annual fees can also add up. For instance, if you’re paying $50 per year on several airline rewards cards, but have never cashed in a single air mile, those accounts might not be the best fit for your spending habits.
One of your best predictors of future spending? Your past spending. Sift through the past six months to a year of bank statements and card bills. What stores and categories get the most of your dollars? Shop for a card that maximizes rewards for what you’re already buying.
Based on your budget and history, what’s a reasonable amount for you to spend (and pay in full), during that introductory period? That’s the kind of fit you want.
See related:Comparing the various types of credit cards
Your credit score is determined, in part, by the variety of accounts you have, and whether you have eaten up a lot of your available credit by carrying balances. In other words, outstanding balances on multiple cards will affect your credit score. Wisely manage those balances and don’t be in a hurry to close out accounts.
Having multiple lines of credit and low balances gives you a low credit utilization ratio, which is good for your credit score. And credit scoring formulas look at both the total of all credit lines, and each individual account.
For your best credit, keep all those ratios to 30 percent or less, says McClary.
The trick to closing multiple accounts? “Don’t cancel all of them at once, “ says McClary. “That creates a cumulative drop in the limit of available credit that can bring a score down much farther than simply closing one card at a time with several months in-between.”
Scoring formulas also reward longer credit histories, so closing out the accounts you opened first can impact your score.
Also, right before you make a big purchase – like a home or car – is definitely not the time to go on an account closing spree. And if you don’t want lenders closing accounts for you, use them every few months and pay them in full. Like everything related to credit, the right answer for someone else might not be the best thing for you.
If you’re struggling with debt and having too much available credit may lead to the temptation to spend, you might be better off canceling those credit cards. It’s better to let your credit score take a hit for closing accounts than to face the consequences of charging too much debt and not being able to pay it off.
“Because 35 percent of the FICO score is associated with on-payment history,” says McClary. So “it’s possible the positives would outweigh the negatives.”
See related:How to cancel a credit cards – wisely
Updated: October 2019