The Complete Workable Guide: How to Build Credit and Keep it Good

In a perfect world for a consumer, you wouldn’t need credit. You’d have the time and cash flow to save money to pay cash for a car or a house. And you’d just keep credit cards around for the rewards.

But, if you’re like most people, you need credit for some things. Even if you’re a good money manager, you likely will need to borrow money when you buy a house or possibly a car. And you might need at least some student loans to get through school.

Plus, it’s not only lenders who use your credit history. In fact, some employers check a version of your credit history to ensure you handle money well and make wise decisions. And many landlords check credit history before you sign a lease. In short, in today’s society, it’s almost impossible to get by without a credit history.

Which Credit Score Should You Track?

When we talk about building good credit, we typically refer to your “credit score” in the singular. But that’s not exactly accurate. In fact, you have tons of different credit scores. Here’s why:

Credit scores are calculated by applying a particular mathematical algorithm to the information in your credit report. You have three different credit reports, one from each major company–TransUnion, Equifax, and Experian. So even if lenders all used the same algorithm, you’d have at least three credit scores.

Except that lenders don’t all use the same algorithm. The same lender may use a variety of algorithms, mainly because different risk factors matter differently in various situations. The risk factors that tell a lender if you’ll default on a $8,000 car loan aren’t the same ones that tell if you’ll go into foreclosure on a $100,000 mortgage.

Essentially, the algorithms track very similar information: your current debt-to-credit ratio, your payment history, the overall length of time you’ve had credit, the mix of your accounts, and your credit application history. But they look at these factors through slightly different lenses, and sometimes apply different criteria.

For instance, some newer scores, like the FICO Score 9, factor out medical-related debt because it’s been shown to be irrelevant to whether or not someone is likely to pay their mortgage on time. You don’t have that debt because of a history of bad decisions. You have it because you had a medical emergency that you’re now paying for.

Which Scores are Available

The major credit scoring algorithms are from FICO and VantageScore. FICO is the one more major lenders tend to use. But the VantageScore is often made available for free from credit score companies like Credit Karma. Each of the three credit scoring bureaus also has its own scores, and there are other smaller credit scoring companies potential lenders can choose from.

You also have other versions of your credit report that are available–often without a numerical score attached–for non-lending purposes. For instance, a potential employer can’t see all of the credit-related data that a potential lender can see. And car insurers can pull a form of your credit report, too, but it’s also different.

So all of this goes to say a couple of things:

1. Don’t be surprised if you see potentially large differences between credit scores pulled from different places. It’s normal and just part of the way things are.
2. When you’re working on building your credit, pick one or two places to keep tabs on your score, and stick with them. The free score options may not be exactly what a lender sees, but they’ll give you a good idea of your progress without costing you an arm and a leg.

Keeping Track of Your Score

As you go on this journey to build credit, rebuild it or improve it, you’ll want to keep tabs on your score. Luckily, this is easier than ever to do for cheap or free. Many credit card companies offer free credit scores along with your monthly bill. And you can use sites like Credit Karma and Quizzle to get other free versions of your score.

Getting on the scale each week while you aim to eat healthier can help you stay on track. And checking your credit score regularly can help you manage your money better. It motivates you to stay on track when your score is going up and keeps you from making major missteps when it starts to dip.

So as you begin this journey of improving your credit score, figure out how you plan to keep track of it, and then start doing it. Find a site that gives you a chart of your score over time, so you can see how it improves during the process, too.

How to Build Credit

Building credit is really about using money and credit wisely. And you have to get credit to build a credit score. Sometimes this means getting a co-signer to vouch for you, especially if you’re under 18. But even if you’re older and have no credit history, you may need co-signer. That’s okay because you have to start somewhere.

Regardless of where you’re at on your journey, though, here are some steps you can take to build, rebuild, or improve your credit:

Open a Checking and Savings Account

Walk into your most convenient local bank and establish a checking account. With this one account, you will be able to open a high-yield online savings account. Having one or more bank accounts is the first step in establishing yourself as a financially stable individual.

Use a Credit Card

While this is sometimes dangerous advice, using a credit card and paying the balance in full each month for at least six months gives you a head start in your credit history. Look for a credit card without an annual fee.

First-time credit card holders may only qualify for a secured credit card. With these cards, you put down a deposit, and the lender holds that deposit in an account. Typically your credit limit matches your deposit. And if you fail to make a payment on time, that payment will come out of the deposited amount. They will use that money if you can’t pay your bill for any reason. Ensure the card you choose reports your credit activity to the three credit card reporting bureaus: Experian, Equifax, and Transunion.

Some secured credit cards automatically convert to unsecured cards if you keep up good behavior. Or they’ll at least check your credit behavior each month to see if you eventually qualify for an unsecured card.

Pay Your Bills on Time

While you probably won’t gain any points by paying electricity and cable bills in your name on time, these companies can report any delinquent payments to the credit reporting bureaus. This will stand out as a negative item on your credit report and will reduce your credit card score.

And, of course, any payments you need to make on outstanding loans, including secured credit cards or student loans, need to be made early or on time every month. Most companies won’t report payments as late until you go thirty days past due. But they technically can report a payment if it’s only one day late, so don’t play with fire here. Make your payments on time, every time.

Take Out a Loan

The best credit histories, according to lenders who make decisions about the interest rates they offer, include a mix of credit types. In addition to credit cards, your mix should include an installment loan. Apply for a small loan with a short-term from a local bank, perhaps from the same bank that is holding your checking account. Pay each installment payment on time and in full to build your credit history.

You may not need to take out an installment loan if you already have student loans. These count in this category. It’s best to let your credit profile naturally evolve over time as you need credit. For instance, if you need to finance a car, do that wisely.

However, if you’re trying to get ready to apply for a mortgage but have never had an installment loan on your record, get one a year or so before you apply for a mortgage. Showing you can be responsible with these payments can be helpful to your credit and potential lenders.

See if you can report your rent payments. Building credit is relatively easy for homeowners. That monthly payment you make to own your home gets reported to the bureaus. But renters have a harder time building credit.

Some programs, though, allow you to report your on-time rent payments to the credit bureaus. They may not be accounted for in every credit scoring algorithm. But you may find that this information becomes important down the road. So if you’re renting, look for ways you can count your rent payments as part of your credit history.

Even if You Have Good Credit

What if you already have good credit? Or what if you never plan to borrow for a home or a car again in your life? Even if this is the case, you still want to pay attention to your credit score.

Credit card companies and other lenders with whom you have outstanding accounts or balances still look at your credit score regularly. Some will reward you with better interest rates or higher limits if you increase your score. But some will penalize you for missed payments–even on other accounts–or an overall decreased credit score.

So if you miss a payment on your car loan, you could take a hit on your ability to use your favorite rewards credit card to the fullest.

Reasons like these are why you want to keep paying attention to your credit score, even if you already know you’re in the good or excellent score range.

Summary

With a country of millions of people looking for credit, lenders want a quick and systematic way to determine how much to charge you for the privilege of borrowing money. At Old Navy, you pay $5 for a tee-shirt, regardless of how well you wear it. But when it comes to debt, you could pay twice as much for the same loan as someone with a better credit history. Making the right decisions early and playing nicely with lenders now can save you tens of thousands of dollars when you shop for a mortgage or can ensure you aren’t turned away from a job in finance because you’re deemed a credit risk.