How to Build Your Credit Score
If someone loans you money, will you pay them back in full and on time? And how does a lender know if you will pay them back? Your credit score is the primary way for a lender to know if you are “creditworthy.” There are lots of things you can do to raise your credit score so that you can obtain a loan easily and at the lowest interest rate. (Who wants to pay high interest, right?) Here’s a practical guide to help you establish and improve your credit score effectively.
What is a Credit Score?
Your credit score reflects your creditworthiness based on these five factors:
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Payment History: Do you pay back your debts on time? If you do, it will increase your score; if you don't, it will ruin your score.
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Credit Utilization Ratio: How much of your available credit are you using each month? A low ratio is better than a high ratio.
Keep in mind that these two factors account for 65% of your score, so focus on them if you want to have the biggest impact on your score.
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Length of Credit History: How long have you had your credit cards? The longer the better. Getting several new credit cards in a short period of time can lower your score.
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Types of Credit Accounts: There are lots of types of credit (credit cards, mortgages, installment loans such as student loans and car loans). Having a mix of accounts increases your score.
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Recent Inquiries: An inquiry happens when a lender looks up your credit report prior to issuing you a loan or credit card. Lots of inquiries might mean that you are applying for too many loans that you might not be able to pay, thus lowering your score.
Get a Credit Card
The first step to increasing your score, aka “building credit,” is to get a credit card. Start by applying for a credit card designed for beginners or those with limited credit history. If you are in college, many lenders have cards designed especially for students. Also, getting a “secured credit card,” where you deposit a sum of money as collateral, can be a good option if you’re just starting out.
Use your credit card responsibly by making small purchases and paying off the balance on time and in full each month to build a positive payment history. Don’t fall for the trap of making the minimum payment. You’ll dig yourself into a financial hole that will be hard to get out of. And just because a lender sets your credit limit to $2,000, that doesn’t mean you can spend that much each month.
Once you get the card, follow these steps to make sure you maintain an excellent score:
• Make Payments On Time, Every Time
Your payment history is the most significant factor influencing your credit score. Set up payment reminders or automatic payments to ensure you never miss a due date. Consistently paying bills on time demonstrates responsible financial behavior and boosts your creditworthiness.
• Keep Credit Utilization Low
Aim to keep your credit utilization ratio—the amount of credit you're using compared to your total credit limit—below 30%. This shows lenders that you can manage credit responsibly without maxing out your cards.
• Monitor Your Credit Report Regularly
Check your credit report regularly from each of the three major credit bureaus (Equifax, Experian, TransUnion) to review your credit history for accuracy. You can access each, once each week, for free. Dispute any errors promptly to ensure your credit score reflects your true financial behavior.
• Limit Credit Inquiries
Minimize the number of credit applications you submit within a short period. Multiple inquiries can temporarily lower your credit score, so apply for credit only when necessary and when you're confident you meet the lender’s criteria.
• Practice Patience and Persistence
Building a strong credit score takes time and consistent effort. Be patient with the process and avoid quick-fix solutions (they’re often scams) that promise to improve your score overnight. Focus on maintaining good financial habits, and your credit score will reflect your responsible credit management over time.
By following these steps and staying disciplined with your finances, you'll lay a solid foundation for a healthy credit score in your twenties and beyond. Building good credit opens doors to better financial opportunities and sets you on the path to achieving your long-term financial goals.
Humphrey Yang shares credit-building tips in this eight-minute video:
Action Plan
Know your credit score and check your credit reports
First, it’s important to point out that your credit score and your credit report are not the same. Yes, they are provided by the same three companies (Equifax, TransUnion, and Experian), but they are not usually included together. Also, credit reports are free, credit scores can be free.
Credit Reports
Get your credit reports for free at annualcreditreport.com. (Do not use any other website for this service; other sites might be scams that will steal your identity.) There you can check your three credit reports. It used to be that you could check them annually for free (hence the name of the website), but in 2023, the law changed allowing you to get free reports once each week. Checking your credit report regularly offers the benefit of monitoring your financial health, identifying errors that could lower your credit score, and detecting unauthorized activities or signs of identity theft.
Speaking of identity theft, it's everywhere! It seems like every week there's a new report about a data breach at some large company. While you can't prevent data hacking, you can protect yourself. One great way to do this is to freeze your credit reports. By freezing the reports, hackers will not be able to use your personal information to open a credit card or borrow money in your name. The process is pretty straight forward and it's easy to "unfreeze" your reports when you want to apply for a credit card or a new loan. When you're ready to apply for the card or loan, just ask the provider which of the three credit agencies they use. Then just unfreeze that credit report.
Beware, however, the three credit companies will try to sell you an "upgrade" to a credit "lock" or other identity protection service. They are not necessary for most people; the credit freeze should be sufficient. And even though a credit "lock" and "freeze" sound the same, they are not. A freeze is free, a lock is not. Be sure to create the freeze for all three companies:
Credit Score
Another warning: these three companies will try to get you to pay to see your credit score while you’re accessing your credit report. Don’t do it. You can get it for free. Many credit card companies offer free access to your credit score. Also, you can get a free look at your score at CreditKarma.com.