Credit 101: Building your credit

Establishing a good credit history is important to your financial success in the future. But good credit is not just about getting a better rate when you’re ready to buy a home or a car. Your credit history can also determine whether you get a job, a deal on your cell phone, or reasonable rates on insurance. One slip-up – a late car payment or maxing out your credit cards – can affect your credit for years.

Now here’s the good news: If you’ve made some mistakes, it is possible to improve your credit score. And if you’re just starting out, you have the opportunity to build your credit history the right way. Here’s what you need to know.

Open checking and savings accounts

The ability to responsibly manage checking and savings accounts are important basic steps that are often overlooked by people seeking credit. More often than not, lenders will see bank accounts as signs of stability. Opening both a checking and savings account is one of the best ways to start building a financial history.

Learn about your credit score

Next, it’s key to understand the basics of credit scoring. Credit scores provide information on how worthy you are for new credit. The three most important factors in your scores are:

• Your payment history: This is the top factor in determining your credit score because it’s a good indicator of whether or not you will pay your bills in full and on time with new credit. Your most recent payment records factor more heavily, which means late payments from your past can be mitigated.
• Your outstanding debt: The more credit cards you have that are maxed out, the lower your score will be. Try to keep your credit card balances at 25 percent or less of your limits.
• The length of your credit history: The longer your credit history, the higher your credit rating.

Automate your bill payments

The best way to maintain a good credit rating is simple: Pay all your bills on time, all the time. That said, it’s a smart idea to set up automatic payments online or use a reminder system so you’re never late in making a payment.

You may also want to set up overdraft protection on the checking account you use to pay bills. Overdraft protection lets you link your account to other funded accounts (like another checking account or a savings account) to cover overdrafts. This could help you if you make a bill payment but are caught short of money in your account. Keep in mind, however, there may be a fee charged each time you overdraft, so be sure you understand how the fees work.

Know your credit limits

Maintain control and don’t max out any of your credit cards. Keeping your credit use to less than 25% of your credit limits (10% is better) will help you get the best possible credit scores. And paying your credit card balances each month is the best way to keep your finances in shape and build your credit at the same time.

Want to see your current credit report and know where you stand financially? The three major credit-reporting agencies – Equifax, TransUnion, and Experian – are required, by law, to provide a free copy, upon request, every year. To get yours, simply visit annualcreditreport.com (the only authorized source for consumers to access their free annual credit report).

FOR MORE INSIGHT

On credit
Building credit from scratch (Consumer Financial Protection Bureau)
Building a Better Credit Report (Federal Trade Commission)

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