How to Build Good Credit

Your credit says a lot about you. Good credit not only tells potential borrowers that you pay your bills on time, but it also demonstrates that you are responsible and able to manage your money. Credit scores, which have become an important metric in our society, are used for renting apartments, job applications, and other things beyond just qualifying for loans and credit cards. That’s why it’s important to understand how to build good credit and what you need to do to maintain your credit.

Anytime you apply for a loan, a lease, or some contract that involves a financial commitment, the other party is going to check your credit score. Individual credit scores are maintained by the three main credit bureaus: Equifax, Experian, and TransUnion. Your credit score can range from 850 (excellent credit) to 300 (very poor) and is based on a variety of factors, including:

• Do you pay your bills on time?
• How many credit accounts do you have (i.e., do you have too many accounts)?
• How long have you had credit (i.e., your credit history)?
• What types of credit have you used?
• How many new credit accounts do you have?

Maintaining a solid credit score is the best way to build good credit. There are a number of ways to check your credit score. Many banks, credit unions, and credit card providers allow you to check your credit for free. There are also free online credit management services, such as Credit Karma, Credit Sesame, Credit.com, and WalletHub, that offer credit monitoring.

How to Build Good Credit

There is no real trick to building good credit. It mostly requires common sense and patience, because much of your credit is based on your credit history. If you follow a few simple money management guidelines, you can build good credit in no time.

To begin, you need a source of money to pay your bills. Maintain a checking account and a savings account so you have money available for monthly expenses such as rent and food, as well as credit card payments and recurring expenses that will be reflected in your credit report. Note that the checking and savings accounts themselves are not included as part of your credit score, but you want to have enough money set aside to keep your bills current.

Having a credit card is an easy way to establish credit and start building your credit score. You can apply for a Mastercard or Visa credit card, or even apply for a credit card at a store you shop at regularly, such as Target. However, to show financial responsibility and build good credit, be sure to make timely payments.

To maintain good credit (and generally stay out of financial trouble), it’s best to never borrow more money than you can afford to pay back. That includes credit cards. Anytime you borrow money or use your credit card, be sure to include those expenses in your monthly budget so you don’t overspend.

In fact, the only way to build and maintain good credit is by paying your bills on time. It’s best to keep credit cards paid in full each month, but if you have to carry a balance, you should pay more than the minimum every month and work to pay down the balance as quickly as possible. Even if you have a card with a high credit limit, maxing out that card will just make it harder to pay off your balance, and it will likely saddle you with interest payments as well.

Loan payments will affect your credit too. If you are carrying student loans, an auto loan, personal loans, or a home loan, payment activity is tracked as part of your credit, so be sure to make your payments on time.

How to Establish Credit

If you are still establishing credit and don’t have a long credit history, you may need some help to qualify to borrow money. If you can’t qualify for a standard credit card, for example, consider applying for a secured credit card. With a secured card, you place an amount of money on deposit as security, and that amount serves as your credit limit. It’s like lending money to yourself, but the card activity is reported to the credit bureaus.

You might also consider a credit-builder loan. These types of loans are designed to help you build or repair your credit by allowing you to borrow a small amount so you can make the payments on time. Typically, the amount you borrow is held in a bank account while you make the payments.

If you need to borrow money but have little or no credit history, you might consider getting a cosigner for the loan. A cosigner is a third party with good credit who guarantees they will take responsibility for the loan should you default. Some student loans often require parents to cosign because the student doesn’t have the credit to qualify on their own.

Another way to build credit is to become an authorized user on someone else’s credit card account, such as your parents or spouse. That way, you are using their good credit to share a credit card. The payment history will be listed on your credit report, even if you never actually use the card. 

Managing Your Credit

Once you establish your credit, you have to manage it. Be sure to check your credit score regularly for any dramatic changes. You should also check your credit report for possible errors. If there are sudden changes in your credit score or errors in your credit report, it could mean that someone has stolen your identity. All of the online credit monitoring services make it easy to review your credit.

To maintain a higher credit score, don’t fill out too many credit applications at the same time. Wait a few months before applying for another credit card or loan.

Over time, you will likely stop using some store charge cards or personal credit cards. Leave those accounts open, though, so they will be part of your credit history.

Also be sure to manage how much credit you actually use. Your debt-to-income (DTI) ratio is an important metric when you apply for a loan or credit card. Be sure that your monthly recurring debt is less than 50% of your monthly income. If you are applying for a home loan, your DTI ratio needs to be closer to 30%.

Understanding how to build good credit can be challenging because there are many factors that can affect your credit rating. Your credit union can help. iQ Credit Union helps its members deal with credit issues every day, and we can show you how to build good credit. A good place to start is with our free Financial Survival Guide. Remember, we are here to help.