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10 Steps for Building Great Credit
By José Omar Rodríguez MONEY RESEARCH COLLECTIVE
An excellent credit score can open doors to increased financial opportunities, such as better loan terms and lower interest rates. However, building a strong credit history requires strategic planning and disciplined financial habits.
Here, we’ll explore some practical strategies to help you build strong credit.
1. Request and review your credit report
First and foremost, you have to know where your credit stands. Consequently, the first step you need to take is to request your credit reports from all three major credit bureaus: Equifax, TransUnion and Experian. These reports are available for free at annualcreditreport.com, the only free credit report website authorized by the federal government. Note, however, that these free reports do not include your credit score.
Once you get the reports, analyze each one carefully, looking for anything that might be affecting your score, such as missed payments, wrong information or high credit utilization ratio.
This process can also help you spot signs of identity theft, like credit accounts you didn’t open yourself.
2. Dispute any errors in your credit report
If you find any incorrect items on your report, you can dispute them directly with the three credit bureaus. This, however, cannot be done all at once; you’ll need to contact each bureau separately to make sure the error is removed from all reports.
You can dispute errors in your credit report in several ways, including:
- Filing an online claim in each bureau
- Writing and mailing a dispute letter to each bureau
- Filing a dispute directly with a creditor
If your report has multiple errors, this process can be time-consuming, which is why you might want to hire a credit repair company to help you dispute inaccurate negative information and handle creditor negotiations.
One thing to remember is that you will only be able to dispute erroneous items in your report, not accurate negative items most of which will stay on your report for seven years.
To learn more about credit repair companies, check out Money’s list of the best credit repair companies of 2024.
3. Pay your bills on time
Approximately 35% of your FICO credit score is based on your payment history, which is a detailed record of how consistently you’ve paid your bills on time. Because this factor is used by lenders to assess your reliability as a borrower, a consistent history of on-time payments will work in your favor.
The golden rule? Pay your bills on or before the due date and, if possible, set up auto-pay so you never miss a payment. If you anticipate difficulty making a payment, contact your creditor as soon as possible to discuss your options.
4. Lower your credit utilization ratio
The credit utilization ratio shows how much of your revolving credit you’re using compared to how much is available. Revolving credit includes credit cards and lines of credit, and this ratio is the second most important factor in determining your credit score, after payment history.
A good rule of thumb is to keep your credit utilization ratio below 30%; however, keeping it in the single digits is even better. If you have credit card debt, consider paying more than the minimum amount due and/or employing debt repayment strategies such as the avalanche method or the snowball method.
5. Become an authorized credit card user
Know someone with a strong credit history? Becoming an authorized user on their credit card can help build your credit score.
You should know, however, that this arrangement requires a significant level of mutual trust in each other’s financial responsibility and that missteps — such as maxing out the credit card or missing payments — will impact both parties’ credit scores negatively.
6. Get a secured credit card
Secured cards are one of the most common credit products used by people looking to restore or build their credit. These types of credit cards have very high approval rates and require a low deposit upfront, which is typically anywhere between $50 and $200. After you make your deposit, you’ll get access to a line of credit.
This line of credit will most likely equal the amount of the security deposit you initially made. It’s important that you stay within that limit and make on-time monthly payments without fail. The card issuer will report those payments and your credit usage to the credit bureaus, which will help you create a good credit history.
7. Consider a credit-builder loan
Credit builder loans offer a unique opportunity to show responsible borrowing behavior. With these types of loans, the lender deposits the loan amount into a savings account or a certificate of deposit (CD) for a set period, usually 12 to 24 months. During this time, you’ll make monthly payments toward the loan.
The lender reports these payments to the major credit bureaus each month, helping you build a positive payment history. At the end of the repayment period, you get access to the funds in a lump sum.
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Limit your credit inquiries
When you apply for new credit cards or other credit products, each application prompts the prospective lender to pull your credit report, which results in an inquiry on your credit file.
These inquiries stay on your file for one year and indicate to potential lenders how frequently you seek new credit. Opening multiple accounts in a short time frame can be seen unfavorably by creditors, so it’s advisable to limit the number of inquiries.
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Keep accounts open
Credit age is another important factor in building credit, which is why, even if you don’t use a credit account regularly, it’s advisable to keep it open.
For example, closing an older credit card account can impact your credit age and also reduce your total available credit, which can result in an increase in your overall credit utilization. Both things can potentially lower your credit score.
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Be patient
Building excellent credit takes time. Even if you’re tempted, you should avoid shortcuts or promises of quick fixes. Instead, focus on responsible financial habits, and you’ll be well on your way to a strong credit profile. Remember, consistency is crucial. Small, steady steps can lead to significant improvements over time.