How to Build Your Credit

I was blessed to have parents who were very responsible when it came to using credit lines and credit cards. They paid their payments on time and didn’t like to have a balance on any revolving credit (a credit card or line of credit from a bank). When I was of age, they put my name on their credit card so their good habits would help to build up my credit score and history. I realize that not many of us have had that opportunity. Here are some tips from various sources that can guide us in building up a good credit score.

From an article by Jilian Minger entitled, “Credit-Score Pitfalls of the Wealthy”, the author advises that “about 35% of the score comes from a person’s payment history. Paying on time helps raise the score, while late payments, lines and bankruptcies will reduce it.”

She also mentions that about 30% of one’s credit score is based on how much someone owes. So common sense leads us to believe the lower the amount of debt, the better.

In addition, the older the credit card or line of credit, the better. Ten percent of the credit score is based on what type of debt you have. Types include mortgages (some of us are there yet, but most of us aren’t), department store credit cards, student loans or auto loans (installment debt). According to the article and Suze Orman’s The Money Book from the Young, Fabulous and Broke, installment loans and mortgages are better for your credit score than just having a retailer credit card (or twenty retailer credit cards…!).

A great resource for researching more about your credit score is Fair Isaac’s website, www.myfico.com.

To build up your score, request a copy of your credit report from each of the three major credit reporting agencies. Better yet, use the website www.annualcreditreport.com instead of the individual websites to get your free reports.

Also according to the article, pay down your credit card debt completely every month. This is a sound financial habit. If you’re currently unable to do that, pay it down to less than half the available balance every month. Not doing so can really cause your credit score to fluctuate.

Here are additional “don’ts” to help your credit score, per the article:

1. Don’t consolidate your debt on another card unless the interest rate is significantly lower and you plan to pay off the entire amount in one year.

2. Don’t cancel your card once you’ve paid it down because the score considers longevity and availability of credit.

3. Don’t stop using credit cards altogether. Many individuals just pay cash and have been taught that credit card usage is evil. However, to build up your score, you need to have a usage history. Even if you just use it once a year and pay it down immediately, having a payment history can be beneficial to you once you apply for a home or car loan. It gives the lenders (usually banks) an idea of how responsible (or not) you are with credit.