How to Build Your Credit Score

Understand the factors that could affect your FICO credit score®
The credit bureaus provide many different types of credit scores. Let's look at the FICO score®, which bases the score on five weighted factors.^1,2

• Payment history - 35%
  The biggest part of your score reflects your track record for paying back debts. Payment history includes credit cards, retail accounts, installment loans (such as automobile or student loans), finance company accounts, and mortgages. Late or missed payments hurt your score. A long record of making timely payments boosts your score
• Credit utilization - 30%
  This shows the amount of available credit you are using. If you have high outstanding balances on your credit cards or they are nearly "maxed out," it could lower your credit score. A general rule of thumb is not to exceed 30% of the credit limit on a credit card³
• Length of credit history - 15%
  This looks at how long you have had and used credit. The longer your history of good credit usage, the better your score will be
• Credit mix - 10%
  This refers to the types of credit you have managed, such as credit cards, installment loans, lines of credit, and mortgages. A good record across a broad mix is taken as a good sign of your debt management skills
• New credit inquiries - 10%
  An inquiry occurs when a lender makes a request for your credit report or score. There are two types of credit inquiries. Hard inquiries, which occur when you make a formal application for a new credit card or a loan, count against your credit score. Soft inquiries, such as requests for your credit report or pre-approved credit offers, don’t count against your credit score

Start early and start small
Since the length of your credit history is a factor in determining your credit score, start as soon as your finances allow it.

Building credit is a little like rolling a snowball down a hill. You start small and let your efforts reinforce each other and grow. For example, it would be counterproductive to apply for a big loan or a premium credit card that you don't qualify for. That would needlessly add to your new credit inquiries. Likewise, you wouldn't want to submit a lot of credit applications in a short period of time. That could have the same effect.

A good place to start is reviewing your credit report. Make sure there are no errors. If you spot any, contact the credit bureau to have them corrected. Find out what your credit score is, too. Your bank might provide the credit score as part of a credit monitoring service. Many credit card issuers and finance websites will do that as well. You also can pay for a credit score service, which might include credit monitoring or other services. Be sure to read the fine print so you know what you are paying for.

Once you know where you stand, you can take action.

Open a starter credit card or store charge card
Lenders often offer options that are designed especially for people who are trying to build credit.

Starter credit cards, sometimes called student credit cards, are made for people with little or no credit history. The credit limit for this type of card tends to be small, but the card might require no credit score to qualify and have no annual fees.

The point is to enable a consumer to form the practice of making responsible purchases and submitting monthly payments, which will build credit.

A similar option is a store charge card. Retailers issue charge cards that generally can be used only in their stores or in stores the company owns. These cards may be easier to qualify for, and they might even get you discounts on purchases. You could save money on qualifying purchases and build credit at the same time. As with credit cards, however, the trick is to use them responsibly and always make payments on time.

Open a secured credit card
With a secured credit card, you deposit a certain amount of money, typically into a deposit account that serves as collateral for your credit card, and that amount sets your credit limit. It's a good idea to confirm that the card issuer will report your payment history to the major credit reporting agencies. If you use and maintain the card and keep it in good standing, you may become eligible to graduate to an unsecured credit card.

Consider credit-builder loans
Specialty credit-builder loans are another option. Because of the way credit-building loans work, you don't need a good credit score to get one. When the bank approves the loan, you deposit the loan amount into a savings account. You then pay monthly installments, usually for six months to two years, and the lender reports your payments to one or more credit bureaus. When you have made all your payments on time, you get access to the money. It's like a savings account, except that instead of earning interest you build credit. These loans might also come with fees, so it's important to check on that before accepting one.

Find a co-signer
Ask a family member or friend about becoming an authorized user on one of their accounts. Credit activity on the shared account may be reported in the authorized user's name as well as the primary cardholder's name. Check with the issuer to confirm that they report authorized users to credit bureaus. It's important to use this method with someone you can trust. Poor decisions by them could hurt your credit score, just as poor decisions by you could hurt theirs.

Pay bills on time
It is important to make all loan payments on time every month. After all, payment history tends to be the biggest factor in a credit score.

If you really want to show off your financial literacy, you might pay your credit card bills early each month. There's an interest-free period, called a grace period, that enables you to pay before interest charges are added.

Your credit score also could be damaged by other types of bills that go unpaid and are turned over to collection agencies, such as utilities, smartphones, and internet service.

As you build credit by using credit cards or taking on loans, create a budget so you can manage your spending. It can be easy to get in over your head. You may want to use autopay to make sure bills always get paid on time.

Evaluate your credit mix
When you start your credit building campaign and order a credit report from one of the three major credit bureaus (Experian™, Equifax®, TransUnion®), take a look at your credit mix. See if you have a mix of revolving credit (credit cards) and installment loans (mortgages, car loans, personal loans). If you have only one type, or lean too heavily on one type, consider getting credit in the other category. Use the tips we already have covered to guide your choices.

Avoid using too many credit checks
As you address your credit mix, be careful about applying for new loans or credit cards. If you apply for several new credit accounts within a short period of time, it could hurt your score. Lenders see that as a possible sign of financial trouble.

The hard inquiries that come with loan applications might lower your score. According to FICO®^,† one additional credit inquiry might take less than five points off their FICO Scores®. The credit scoring models do account, however, for rate shopping. Contacting different lenders for a car loan or mortgage to get the best interest rate should not count against your score. FICO®, for example, treats several inquiries for one type of loan within 30 days or so as one inquiry.

There are tradeoffs to consider. To build a credit history, you must apply for credit. Applying for a loan to improve your credit mix will add to the number of inquiries, which might have a small negative effect on your score. Getting a new credit card might cause a drop in the "length of credit history" part of your score, which also can have a negative impact. The good news is that payment history (making payments on time) and credit utilization (moderate use of available credit) have a much bigger effect on your score.

Use caution when closing accounts
Let's say that you opened a credit card account just because it was easy to get approved, but you find you aren't using it. Closing that card could hurt your credit score in a few ways.

So, instead of closing it, you could help your score by using the card every now and then to make a small purchase and pay the balance right away—even before any interest charges are applied. That could boost your score by improving your payment history, credit utilization, and length of credit history.

Even if you don't use the card, it's still helping your credit utilization and length of credit history, which includes the age of your oldest account, the age of your newest account, and an average age of all your accounts.