How to Build Good Credit and Increase Your Credit Score

Whether you're looking to build your credit from scratch or you're in need of a quick credit boost, we've got a variety of tips and tactics to help you out.

Below, we'll break down how credit scores are calculated (so that you can reverse engineer the system), what a "good" credit score really is (and why it's important), and then we'll share a variety of credit building tactics to help you build and raise your credit score as quickly, efficiently, and inexpensively as possible.

So, new credit users and old credit users alike, let's dive in!

What is a Credit Score?

A credit score is a three-digit number that lenders use to determine how likely you are to pay back the money that you borrow. The score is made up of a variety of factors and is quite an important part of your financial identity as it can not only affect your ability to borrow money, but also greatly impact how expensive it is for you to borrow.

How Are Credit Scores Calculated?

Credit scores are calculated based on your past credit usage.

See, whenever you open or apply for a new credit card or loan, make or miss a payment, carry a credit card balance, declare bankruptcy, or conduct some other credit-related activity, that activity is typically reported to one (or multiple) of the three major credit reporting agencies:Equifax, Experian, and TransUnion.

These credit agencies compile all of the information they receive about your credit usage into something called a credit report. The information in your credit report is then grouped into categories and run through an algorithm to calculate your credit score.

To see how exactly your information is grouped and weighted, let's look at two of the most popular credit scoring models:the FICO Score and VantageScore.

Note:You can receive your credit reports from each of the three major agencies above for free, once every 12 months, from AnnualCreditReport.com.

FICO Score

The FICO Score - one of the most popular credit scoring models - calculates your credit score by grouping your data into five main categories:

Payment history (35%). As you might've guessed, your history of paying your debts on time makes up the biggest chunk of your FICO Score. Lenders want to be sure that you'll pay them back on time, so any missed payments will impact your score quite a bit.Amounts owed (30%). This one might actually surprise you. Believe it or not, the amount of available credit you actively use (i.e. your credit utilization) makes up the second-biggest chunk of your FICO Score. That's because in a lender's eyes, if you're using up almost your entire credit limit (e.g. you have a $4,500 balance on a credit card with a $5,000 limit), that might mean you're short on cash and therefore a higher risk borrower. Length of credit history (15%). This is the third most important category. It looks at the age of your credit accounts along with how long it's been since you used certain accounts. This is far less impactful on your score than your payment history and credit utilization, but still an important factor to be aware of.Credit mix (10%). This category looks at the different types of credit you've used. Ideally, you want a mix of revolving credit (e.g. credit cards) and installment credit (e.g. student loans, auto loans, mortgage). The more diverse your mix, the more proof to lenders that you can handle a variety of credit accounts. But, that doesn't necessarily mean you should go on an application spree. It's better to focus on using your current credit responsibly versus opening new credit accounts simply in hopes of increasing your score.New credit (10%). Speaking of new credit, that's the final category and it makes up 10% of your FICO Score. Opening new credit accounts can affect your score in multiple ways. First, when applying for new credit, lenders will typically conduct hard inquiries on your credit report, and this can ding your score a few points. Second, opening a new credit account can lower your average length of credit history (#3 above), which can also reduce your credit score. On the positive side of things, however, a new credit account might increase your credit mix, resulting in a higher score over time. Still, as mentioned above, you shouldn't apply for new credit unless you really need it.

VantageScore

The VantageScore, another popular credit scoring model, uses similar data categories, but with a slightly different order of importance:

Total credit usage, balance, and available credit (extremely influential). This is essentially the same as the "amounts owed" category above. And while FICO ranks this category as second-most important, your credit utilization is what impacts your VantageScore the most.Credit mix and experience (highly influential). Having a diverse bag of credit (e.g. credit cards, auto loans, mortgage, etc.) will have a large positive impact on your VantageScore. This is quite different from FICO, where your credit mix only accounts for 10% of your score. Payment history (moderately influential). While your history of paying debts on time is the most important one in determining your FICO Score, it's only moderately influential to your VantageScore.Length of credit history (less influential). Same as the FICO category above.New credit (less influential). Same as the FICO category above.

What's Considered a Good Credit Score?

The typical credit score ranges from 300 to 850. FICO and VantageScore both use this range. However, similarly to how their methods for calculating credit scores differ slightly, they also rank individual scores a bit differently.

Here are FICO's rankings:

< 580 = Poor. At this credit score range, you'll be seen as a high-risk borrower and may have trouble being approved for new credit accounts.580-669 = Fair. If you're in this range, your score is below average, but should still be able to find plenty of lenders that will work with you.670-739 = Good. If you're in this range, you have a near or above-average credit score. Nice!740-799 = Very Good. At this range, your score is above average and you'll be seen as a very dependable borrower. You should be able to secure the best rates in most cases.800+ = Exceptional. Congrats! If you've made it here, you're doing extremely well with your credit. Your score is way above average and you should have no problem being approved for new credit at the lowest available rates.

And here are VantageScore's rankings:

300-499 = Very Poor500-600 = Poor601-660 = Fair661-780 = Good781-850 = Excellent

As you can see, the rankings are slightly different, but the idea is the same. A credit score of around 670 is good, but a score in the 760+ range will typically get you the lowest borrowing rates. In fact, John Ulzheimer, financial expert and former employee of FICO and Equifax, says that, "The best-published interest rates for auto loans are 720+ and for mortgages 760+."

In other words, while getting a perfect 850 credit score is impressive and definitely gives you bragging rights in the finance world, it's really at the 760-780 range that you'll start to see the biggest benefits of a good credit score.

Speaking of benefits:

Why Is a Good Credit Score Important?

As we've already mentioned multiple times, the biggest benefit to having a good credit score is that it gives you access to the best borrowing rates. But, how much of a difference does this really make? How much money will a higher credit score actually save you?

Well, if you take a look at the calculator on MyFico, you'll see that the difference can actually be pretty substantial. For example, if you took out a 30-year fixed loan for $100,000, with a credit score of 620-639, you'd pay around $92,970 in interest over the lifetime of the loan. On the other hand, with a score of 700-759, you'd pay just $64,077 in interest over the lifetime of the loan.

In other words, in this case, a credit score increase of around 100 points could save you $28,893.

Of course, that's just one example, but it goes to show how much of a difference a good credit score can make.

On top of that, there are many other benefits to a good credit score:

You'll have a better chance of being approved for new credit. Lenders prefer to give credit to those with a good track record. This also applies to credit increases.Landlords will be more likely to rent to you. Yep, landlords check your credit too. And the better it is, the better your chances of being approved as a tenant. Having good credit history can also reduce your security deposit.You might get better rates on insurance. Some insurance companies (think for car insurance or home insurance) consider your credit score as a factor when determining how much to charge you.It might help you land a new job (or promotion). Some employers check credit reports as part of their background check process. A history of on-time payments and well-managed credit accounts can help show that you'd be a responsible employee.You'll be able to get utility services more easily. When applying for services like gas and electricity, utility companies may check your credit history. And, the better your history, the easier it will be for you to get service.

How to Check Your Credit Score and Reports

As mentioned above, you can receive free copies of your credit reports from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) for free once every 12 months from AnnualCreditReport.com. However, these reports won't include your credit score, so you'll need to go elsewhere for that.

Here are a few of the best options:

Your bank or credit card company. Many financial institutions provide credit score services these days. You might be able to find your score through your online banking dashboard or on your monthly statement. Credit Sesame. This service is free to use and uses data provided by TransUnion to provide your credit report and calculate your credit score. Credit Karma. Similar to Credit Sesame, this is a free service. However, Credit Karma provides your reports and scores from both TransUnion and Equifax, so it gives you a bit more data to look at.

When checking your score, keep in mind that different credit bureaus, creditors, and credit scoring models can result in you having several different credit scores. For that reason, don't be surprised if your scores vary slightly across the different credit score providers above, or if lenders report a different score when you apply for credit.

Note:Checking your credit score using any of the services above won't impact your score in any way. They use what is called a soft inquiry or soft credit check.

How to Build a Good Credit Score

Ok, the basics are out of the way. You now know what a credit score is, how it's calculated, why it's important, and how to check your own. Now it's time for the fun part!

You probably already have an idea of how to build good credit and improve your credit score just using the knowledge you gained above, but we've got some additional tactics and tips to help you really become a credit master...

1. Check Your Credit Reports Often

The reason I love the services above like Credit Karma and Credit Sesame is that they allow you to check your credit reports frequently. In fact, Credit Karma updates your reports and scores every single week. While you definitely don't need to check them that often, checking once every few months or so is a good idea.

When you look at your credit report, be sure to keep an eye out for incorrect or inaccurate information. This can either happen accidentally (e.g. due to a typo or name mixup) or it can be an early sign of identity theft. Either way, if you notice anything off, be sure to file a dispute right away. You can do this online with each of the three major credit bureaus.

Recognizing any mistakes and reporting them right away will keep any incorrect information from affecting your score negatively.

Another thing you can look out for when checking your credit reports is missing information. If a creditor that you're in good standing with isn't reporting your information to the three major credit bureaus, that can have an impact on your score. Try reaching out to the creditor to change this. If they simply don't want to report to the bureaus, there's not much you can do (besides switch to a new creditor), but it's worth asking.

2. Pay Your Bills On Time

Payment history is the biggest factor considered when calculating your FICO Score so even one missed payment can impact your score majorly. Don't believe me? Just look at this Redditor whose score tanked from 817 to 643 due to one missed mortgage payment.

To prevent this, you should do two things:

Set monthly reminders before each of your bill due dates. When the reminder goes off, review your bill and pay it in full. Set up an autopay system from your bank account. You can either set this up to pay the bill in full, or to pay the minimum amount. Either way, it's extra protection in case you miss your reminders or something else happens.

Keep in mind, this doesn't just apply to credit cards and loans. If you miss a payment on one of your utility bills, that might be reported to the credit bureaus as well.

3. Keep Your Credit Utilization Ratio Low

As mentioned above, your credit utilization ratio is the amount of your available credit limit that you're actively using. It has the second-highest impact on your FICO score and is "extremely influential" on your VantageScore, so it's important to be aware of.

So how much of your credit limit should you use?

Well, it's generally common advice to use no more than 30% of your available credit at a time (VantageScore themselves recommends it). However, the lower the better. In a CNBC article from 2019, it's quoted that "FICO research shows that the highest-scoring 25% of consumers -- those with a score above 795 -- use an average 7% of their credit limit."

Here are two simple tips to help you get there:

Pay your card balance often. Your current credit usage doesn't actually have an effect on your credit score until it hits your credit report, so if you pay the balance down before then, your credit utilization will stay low. For that reason, paying multiple times throughout the month can be a good idea. Or, at the least, if you have a big transaction one day, pay it off soon afterward to keep your balance low.Ask for a credit limit increase. If you've been with a credit card company for a while now and you've always paid your balance on time, call up the company and ask for a limit increase. Most companies will be happy to do this for you. And by increasing your limit on a pre-existing credit card, you'll lower your overall utilization without having to open a new account. Remember though:just because your limit is higher doesn't mean you should spend more.

4. Think Twice About Canceling Old Credit Cards

If you have an old credit card lying around that you haven't been using for whatever reason and you're thinking about canceling it, think twice. Closing an account can lower your overall available credit and increase your credit utilization, which can have a negative impact on your score. And, although closed cards will remain on your credit reports for 7-10 years after they're canceled, if/when they're removed, your length of credit history can change, which could also affect your score.

For both of these reasons, if the card doesn't have an annual fee, you're probably better off keeping it open. That said, you'll want to keep some activity on it to avoid it being closed automatically. An easy way to do this is to simply use the card for a recurring monthly subscription (like Netflix). You can then set up an autopay system, put the card in a drawer in your desk, and then just monitor it monthly.

By doing this, your credit history stays intact, your card stays active, and your credit score should improve over time due to the low utilization.

5. Don't Apply for Too Much Credit Too Fast

Not only would the approvals lower your average credit account age, but all the hard inquiries (from lenders checking your credit reports) will also have a negative effect on your score. Applying for multiple credit accounts in a short time frame can also send off red flags as it can give off the impression that you're short on cash and preparing to take on a ton of debt.

To prevent this, before applying for any new loans or credit cards, do your research to find the very best options. Look for loans/credit cards that not only meet your needs but that you also have a good chance of being approved for. This will help keep your applications to a minimum and will also prevent you from acting too quickly and applying for credit that isn't a good fit.

6. Become an Authorized User on Someone Else's Credit Card

This is an interesting way to build credit without your own credit card. It's also a tactic you can use to rebuild your credit score.

By becoming an authorized user on someone else's credit card, you can instantly boost your credit history and lower your credit utilization. Just make sure that the primary cardholder you're planning to join has a clean payment history and low credit utilization, otherwise, this tactic might hurt more than it helps. You'll also want to make sure that the card issuer reports authorized users to credit agencies, as not all credit card companies do.

7. Beef Up Your Credit Reports With Utility Payments and Banking Activity

Although things like utility payments and basic banking activities aren't typically included on your credit report, nowadays, there are services that can change that. These typically exist to help those with limited credit history establish credit, but they could help you boost your credit score as well.

Here are two of the most well-known options:

Experian Boost. This is a free service designed to help boost your FICO score by giving you credit for bills like your phone, utilities, and popular streaming services.UltraFico. UltraFico allows you to share data about your banking history (e.g. average account age, cash on hand, etc.) to potentially increase your FICO score.

Neither of these services guarantees a credit score increase, but they're definitely worth a shot. Any little bit helps!

How Long Does It Take to Build Credit?

Unfortunately, it's a lot easier to tank a good credit score quickly rather than turn a low score into a high one. If you follow the steps and tips above, you should see your credit score increasing each month, but depending on your starting point, it can take several months in order to reach that coveted "excellent" level.

If you're not getting the results you were hoping for right away, don't get too discouraged. Focus on continuing to build up good credit habits and it will pay off in the end. Good luck!