How to Build Credit
A good credit score is essential if you want to qualify for the lowest interest rates and the best loans available. Building your credit takes time, whether you are starting out for the first time or trying to repair past credit mistakes. Understanding how to build credit will allow you to improve your score and become more attractive to banks, lenders and credit card companies.
A credit score is based on several different factors. Each of these factors plays a role in determining your creditworthiness. If you want to build credit there are different ways that you can improve each area. As you work on each aspect of your credit score you will be able to build credit.
Payment History
Approximately 35% of your score is based on your payment history. Making payments on time is essential in building your credit. Not all companies report late payments to the credit bureau, but if a late payment is reported it can really hurt your credit. Make sure that you pay all of your bills on time, but especially those that might report to the credit bureau like your mortgage, car and credit cards. You should also avoid having accounts that go to collections. It is better to pay off a disputed balance and handle the problem in court than to let an account go to collections.
Amount Owed
Another 30% of your score is based on the amount of debt that you carry. This portion of your credit score looks at the total amount that you can borrow and the percentage that you have borrowed. For example if you have a credit line of $10,000 and you currently owe $3,000 you still have a high percentage of available credit. On the other hand if you owe $9,900 you have almost met your credit limit. You can build your credit by paying down debts and reducing the percentage of debt that you carry.
Length of Credit History
The next factor that determines your credit score is the length of time that you have had a credit history. Building credit takes time and if you applied for your first credit account only a few months ago, it will take several months or years to establish your credit. Keep making payments on time and managing your debt responsibly.
New Credit
Opening a lot of new accounts at the same time can hurt your credit score. Instead if you want to build credit you should slowly and carefully open new accounts. It is important to establish new credit, but you should use wisdom in selecting new accounts.
Types of Credit
One final factor that will determine your credit score is the variety of credit that you hold. Having a variety of different credit types will help you to build your credit score. Try to have a mix of different credit types like credit cards, a mortgage, a car loan and accounts at retail stores.
Building your credit score will take time, but it is possible. As you work on establishing the best credit history possible remember to focus on each of these areas as they all make an impact on your credit.
