30 Things You Need to Know to Build Credit

katleho Seisa / Getty Images

katleho Seisa / Getty Images

If you’re thinking about doing anything that requires someone to review your credit — like buying a home or car, taking out a loan or applying for a new credit card — you’ll want to make sure that your credit score is as high as it can be. What is a good credit score anyway?

Start by learning about credit scores and how they can help you climb the ladder of financial success. Once you understand the basics, you can put some credit-building strategies into action.

Click through to learn everything you need to know about credit and get your highest credit score yet.

1. Typical Credit Scores Range From 300 to 850

Your credit score is calculated using information in your credit reports, such as credit limits, loan amounts and payment history. Like other scoring models, the FICO credit score range is 300 to 850, and the average credit score for U.S. consumers is 695.

According to Experian, one of the three national credit bureaus in the U.S., a good credit score is anything from 670 to 739 on the FICO range. A score of 600 is generally considered fair, and 579 or lower qualifies as “very poor.” You might need tips to repair your score if you find yourself under 579.  The higher your credit score, the better shape you’re in to qualify for a loan from a lender.

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2. Good Credit Can Save You Money

A good credit score starts around 700 and might get you offers of lower interest rates for mortgage loans, car loans and credit cards — which means more money you can keep in your pocket. Lenders also use the scores to disqualify consumers for the best, most competitive terms and rates.

3. FICO Is the Most Commonly Used Score

Of all the credit scoring models, the FICO score is the most popular. The FICO score is used in about 90 percent of credit decisions, according to Experian. You might have a slightly different FICO score from each of the three credit bureaus based on the different information in each credit report.


4. ‘FAKO’ Scores Are Just Non-FICO Credit Scores

A “FAKO” score is a term used to describe non-FICO credit scores such as the VantageScore, which was developed by the three credit reporting agencies — Experian, Equifax and TransUnion. Despite the seemingly derogatory term used for these non-FICO scores, FAKO scores can be a trustworthy alternative to FICO.

5. Credit Scores Vary and Change Over Time

Different types of scores might vary, and scores can increase or decrease over time based on the information in your credit reports.

If you’re comparing different credit scores across the three bureaus, MyFICO recommends you access your scores at the same time. “Comparing a score pulled on bureau ‘A’ from last week to a score pulled on bureau ‘B’ today can be problematic as the week-old score may already be dated,” according to the site.


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6. You Can Get Your Credit Report for Free

You should know what a credit report is — and what your own report looks like. Thanks to the Fair Credit Reporting Act, you’re entitled to one free credit report from each of the three credit bureaus every year. You can order your annual free credit report online by visiting AnnualCreditReport.com.

Your free annual credit report does not include your credit scores, however. Instead, you can buy your credit score directly from the credit bureaus, according to the Consumer Financial Protection Bureau.

Your credit card company might share your FICO score with you for free, or you can turn to a third party that offers free credit scores. Note that checking your credit score yourself won’t hurt your score.

7. Different Lenders Use Different Credit Scores

A vast majority of lenders use the FICO credit score scale, but there are actually multiple versions within the FICO model. FICO released the latest version, FICO 9, in 2014. Many mortgage lenders haven’t updated to this version and are using older versions, however. You should ask your lender which version they are using so you can take the necessary steps to increase your credit score.

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8. FICO Score Products Include Industry-Specific Versions

You have three basic FICO scores — one from each of the credit bureaus — but your scores might vary depending on whether you’re applying for a mortgage loan, auto loan or credit card. Although finding out your industry-specific scores might cost you extra, reviewing these scores before applying for a loan could pay off.

Many auto lenders, for example, use your FICO auto score rather than your basic FICO score when determining credit risk, CNBC reported. You don’t have to have a perfect credit score to qualify for most loans, and knowing the qualifying score for the specific type of loan you want will help you set your goal score.


9. Negative Items Stay on Credit Reports for a Long Time

Some negative items, including late payments, collections and foreclosures, can remain on your credit report for up to seven years, according to MyFICO. A Chapter 13 bankruptcy remains on your credit history for seven years as well, but a Chapter 7 stays on your report for 10 years. Unpaid tax liens can stay on your credit report indefinitely, so it’s important to fix your credit score as soon as possible.

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10. Spread disputes over a period of time

According to Trans Union,  by law credit agencies can refuse to investigate a dispute if they seem to be excessive, or irrelevant. This red flag can be avoided by disputing inaccuracies one at a time, instead of all at once.

11. You Can — and Should — Dispute Credit Report Errors

There’s no quick answer to the question of how to fix a credit score, but removing errors from your credit report can help improve your score. If you believe some of the information in your credit report is inaccurate, you should dispute the credit report errors.

To file a credit report dispute, the Federal Trade Commission recommends writing a letter to the credit reporting company and the information provider addressing the information that is inaccurate. The FTC offers sample dispute letters and more tips to help you get started.

12. Tax Liens Can Be Withdrawn From Credit Reports

A federal tax lien is basically the government’s legal claim to your property if you fail to pay a tax debt. If a tax lien is on your credit report, it can prevent or limit you from getting credit.

Fortunately, the IRS allows you to have a tax lien withdrawn if you pay it in full or enter a direct debit installment agreement. The latter allows you to pay the lien in direct debits, but you have to meet some requirements first. For example, you must owe $25,000 or less, and you must pay the tax lien in full within 60 months. Making sure you meet these requirements can be a helpful step toward improving your credit score.

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13. Low Credit Utilization Can Help Repair Your Score

Another way to boost your credit score is to keep your credit utilization ratio low. That means you should focus on keeping the amount of credit you have available relatively high. For example, if you owe $1,000 on a credit card that has a $10,000 credit limit, your ratio is pretty low at only 10 percent. But if you owe $5,000 on that credit card, your ratio jumps to 50 percent, which can damage your credit score.


14. You Should Avoid Using Credit Cards With Balances

Stop using credit cards that carry an existing balance if you want to boost your credit score. Charging credit cards that already have balances will only further increase your credit utilization ratio, which is something you don’t want to do. If you want to start building good credit, be extremely careful and smart about how you handle and pay off your credit cards.

15. Emergency Funds Can Prevent Credit Card Usage

An emergency fund in a separate bank account can prevent you from resorting to using your credit cards when an emergency strikes. With some money in savings, you won’t have to risk using more of your credit and increasing your credit utilization ratio. Building an emergency fund is easy to do, but it does take some preparation in advance.

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16. Paying Bills on Time Can Boost Your Score

One of the quickest ways to improve your credit score is to consistently pay all of your bills on time. Your payment history alone accounts for 35 percent of your total FICO score.


17. Paying Off Balances Early Creates a Good Payment History

If you don’t carry balances, using your credit cards periodically for purchases you can afford to pay off before the payments are due can help establish a good payment history without accruing any interest charges. When in doubt, pay off credit cards early.

18. Technology Can Help You Pay Bills on Time

A budget and a calendar, as well as text or smartphone alerts, can help you pay bills on time and avoid unnecessary late fees and bank fees. You can also set up online bill payment or autopay on many accounts to minimize the time and effort you spend paying bills.

19. Make Your Teen an Authorized User to Help Build His Score

Using credit cards can help your teenager learn how to build credit and increase his or her credit score. Making your teen an authorized user on a parent account that you control is a good way to build a positive credit history.

Just remember: If you have a bad credit history, it could reflect poorly on your teen. And if your teen owes money on the credit card, that means you owe money, too.

20. Hard Inquiries Can Impact Your Score

Frequent hard inquiries can decrease your credit score if it looks like your lifestyle is credit-dependent. Hard inquiries occur when potential lenders review your credit because you’ve applied for credit with them.

Credit checks when you’ve applied for a credit card, car loan or mortgage all count as hard inquiries and each type of credit check counts as one inquiry. Checking your credit scores and reports, however, does not result in a hard inquiry.

21. Student Loan Debt Can Hurt Credit Scores

Just like with any debt, having too much student loan debt isn’t good for your finances. And making late payments on your student loans can hurt your credit score, as well.

If it’s too hard to manage all of your student loans, consider consolidating them. Equifax warns that because consolidating your student loans triggers a hard inquiry, your credit score could take a small hit. But if consolidating helps you make on-time payments moving forward, the long-term benefit could be a higher score.

22. Co-Signing Loans Can Also Hurt Your Credit

You should think twice, maybe even three times, before co-signing loans of any kind — including student loans or car loans — for your kids or grandchildren. If they miss a payment or default on the loan, your credit could be at risk.

23. Check for Identity Theft Frequently

Identity fraud and theft can ruin your credit score quickly. Signs of identity fraud include accounts you didn’t open, purchases you didn’t make and services you didn’t order, which might appear on your credit report and affect your scores negatively. Check your credit report frequently to keep an eye on any unusual activity.

24. Keeping Unused Credit Cards Can Pay Off

One of the best ways to build credit is to keep all your credit cards open. Keeping paid-off or unused credit cards can help boost your credit score because you are keeping that unused credit and, thus, improving — that is, lowering — your credit utilization ratio.

Closing credit cards is equal to eliminating some of your available credit, which results in increasing your credit utilization ratio, according to MyFICO. Keep your accounts open as part of a strategy to get good credit.

25. Credit Repair Companies Can Do the Work for You

Although you can repair your credit and boost your score yourself, a reputable credit repair company that has expertise in dealing with the credit bureaus can more efficiently identify derogatory items on your credit reports that can be changed. A credit repair company can challenge those items and confirm that errors or negative items have been removed to boost your score faster.

26. The Longer Your Credit History, the Better

Your average credit age — the average age of all your accounts — is another factor in your credit score. Although there’s no set amount of time required to have a good score, the general rule is that a long credit history is better because the length and track record reflect your experience with building credit and demonstrating responsible credit usage.

There’s no way to build credit fast — it has to be done over time. FICO scores factor in average credit age by considering how long your specific credit accounts have been established and also how much time has passed since you used certain accounts.

27. Account Mix Matters

Credit mix accounts for 10 percent of your FICO score. This means all your credit cards, retail accounts, installment loans, finance company accounts and mortgage loans are taken into consideration. These credit types generally fall under one of two categories: installment or revolving.

Installment credit is debt paid in installments over time. Student loans, personal loans and mortgages fall under the installment category. Banks and financial institutions offer revolving credit — lending you money up to a maximum amount with the credit line remaining open for your access whenever you need it.

A home equity line of credit and retail charge cards are considered revolving credit. Your credit account mix can show diversity in the type of credit you use and how you choose to build your credit.

28. Keep Cards With the Most Spending History

Once you have your first credit card, keep it handy for as long as you can. 15 percent of your credit score is determined by longevity, so that credit card you opened in your early twenties is playing a very important role.

With that being said, there are different variables to take into consideration when determining the longevity of your credit. It’s best to play it safe if you are a younger person building credit to keep a hold of your old cards.



29. Pay Off Past Due Fines at the Library

Out of all the things that could damage your credit score, not paying your fines at the library is the most surprising. To stay safe, make sure all municipal debts are paid off when trying to build a healthy credit score — and get inventive with using your credit card to make money to try and counteract those fees.

30. Don’t Have a High Credit Ratio

If you’re using all of the credit that is available to you, it tells creditors that you may be living on credit and that you are at a higher risk of not paying back what you borrowed.

Credit utilization rate takes up 30 percent of your credit score rating. Making sure you have a lower utilization ratio will improve your credit score greatly.

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Priscilla Aguilera contributed to the reporting of this story.