My interest in building and maintaining excellent credit began around the age of 18 when I overheard my parents discussing their next automobile purchase. At the time, they had to decide between purchasing a used vehicle outright with cash and financing a new vehicle from the local dealership at 0% interest for five years.
They explained how the interest rate on the automobile loan was tied to their credit, and the reason they were offered a 0% interest loan was due to having outstanding credit. Even though I didn’t yet fully understand this relationship, I remember thinking to myself, “Outside of automobile loans, what other important financial decisions involve credit?”
That question is no less relevant today that it was a decade ago. In fact, after earning a PhD in financial planning and building an 800+ credit score myself, I would argue that building a positive credit profile is more important today than ever before.
The remainder of this guide will explain why good credit matters in our modern economy, and provide step-by-step instructions to help you build and maintain outstanding credit for the rest of your life.
Table of Contents
- Is Building Good Credit Important?
- Meet Your Credit Profile
- How to Build Perfect Credit
- Final Thoughts
Is Building Good Credit Important?
Before we get into the details about how your credit profile is created and calculated, let’s talk about the practical implications of building good credit.
While teaching personal financial planning courses at Texas Tech University, I was always surprised when a student of mine would suggest that credit is unimportant. Nothing could be further from the truth, and with each year that passes, credit plays a larger and more critical role in shaping a successful financial life.
To illustrate, consider the following examples.
Loan Interest Rates
If you would like to purchase a home, you must meet certain credit standards to qualify for a home mortgage loan (unless you are paying cash and don’t require a loan). If you do qualify for a loan, your credit profile determines the interest rate on the loan.
Using the official FICO loan calculator (FICO is the primary credit scoring firm in the U.S., as discussed later) I created the following table to illustrate the relationship between credit and mortgage loan interest rates for a $200,000, fixed 30-year mortgage.
|FICO Score||APR||Monthly |
|Total Interest |
With excellent credit (typically defined as 760 or above by mortgage lenders), you should qualify for the lowest possible APR interest rate on any loan. Anything below excellent credit will result in a higher loan interest rate, which means a higher monthly payment and an increase in the total interest paid to the lender.
The difference between total interest paid by individuals with excellent credit and those with less-than-excellent credit is calculated in the “Credit Penalty” column. For example, someone with a credit score of 675 can expect to pay an additional $26,155 of interest over the life of a 30-year mortgage loan when compared to someone with excellent credit.
The observed relationship between credit and loan interest rates holds true for almost every type of available loan, including automobile loans, private student loans, personal loans, business loans, etc.
Most Americans will finance several home and automobile purchases over a life cycle, which makes this a topic of immediate importance. With thousands of dollars in wasted interest payments on the line, anything less than excellent credit just doesn’t make sense.
Travel Rewards and Cash Back
Your credit profile will determine the introductory interest rate offered by any credit card, similar to the mortgage loans mentioned above. But in my opinion, it really doesn’t matter. Even with excellent credit, the interest rate on credit card debt is astronomical. If at all possible, you should avoid carrying any type of credit card debt balance.
The more interesting reason to build excellent credit is to obtain a variety of credit card rewards. With a credit score above 700, it’s possible to be approved for dozens of credit cards. Even better, many of the best cards offer generous signup bonuses when you are approved.
For example, it’s not uncommon to see credit cards offering a signup bonus of 60,000 airline miles or 80,000 hotel points after spending $2,000 within the first 90 days of card ownership. If you’d like to see current, real-life examples of these offers, feel free to browse my airline comparison page or hotel comparison page.
You can use these credit card rewards to take extravagant vacations for free. For example, Vanessa and I were able to earn several hundred thousand American Airline miles by applying and meeting the minimum spend requirements on several Citibank credit cards. We then used those miles to fly in first class on American’s partner, Japan Airlines, on our recent trip to Southeast Asia. For the flight we booked, the cash price was almost $8,000 per person in first class. By using airline miles instead, the out of pocket cost was roughly $60 in airport taxes and fees. We also paid for hotels using a separate stash of Marriott reward points that were obtained from credit cards.
Even if you aren’t interested in taking international vacations, cash back credit card rewards can be generous. For example, some cash back credit cards earn 5% cash back on rotating quarterly categories and carry no annual fee. Some of these cards even match all cash back earned in the first year, effectively offering 10% cash back in each category. How can you beat earning 10% cash back on the purchases that you already need to make, without paying a dime in fees? That’s literally the definition of free money.
And with excellent credit, there is no limit to your earning potential. You can obtain airline miles from one card, hotel points from another, and cash back from a third. The entire universe of credit card rewards is at your fingertips when you build excellent credit, but no such opportunities exist for individuals with poor credit.
The importance of building excellent credit goes beyond loan interest rates. Most U.S. insurers now include your credit information as a potential risk factor when determining coverage eligibility and establishing your monthly insurance premiums (except in Massachusetts, Hawaii, and California, which ban the use of credit in risk underwriting).
For example, in the auto insurance industry, your credit information is used alongside your driving history, claims history, vehicle information, and geographical location to determine your overall risk profile. Home, renters, and other types of insurance use similar methods.
Research has shown that credit information plays an important role in determining future accident potential. Individuals with higher credit scores tend to get into fewer accidents and cost insurance companies less money than their lower-scoring counterparts. In 2003, The University of Texas conducted an analysis using 175,647 auto insurance policies. They found that individuals with poor credit incurred higher losses and were more likely to be involved in accidents. In 2007, The Federal Trade Commission found that credit-based insurance scores are effective predictors of risk, supporting earlier research.
In light of these findings, most insurers heavily weight your credit information when setting monthly insurance premiums. For example, Consumer Reports released a research report documenting how poor credit can double or triple your monthly auto insurance premiums (when compared to excellent credit). Another study conducted by InsuranceQuotes found that on average, homeowners with poor credit pay 91% more for coverage than homeowners with excellent credit.
What’s the takeaway? Individuals with poor credit can expect to pay higher monthly insurance premiums in many states, while individuals with excellent credit have nothing to worry about.
Contracts and Deposits
If you are looking to rent a home or apartment, many landlords now request your credit information as part of the rental agreement. You can deny the request, but many landlords will respond by denying your rental application.
When requesting your credit, property managers are looking for any signs of trouble, including any type of late payments, bankruptcies, or evidence of prior eviction. If they find negative information on your report, some landlords will deny your rental application. Even if you are approved, many will require a large upfront deposit or advanced rent payments.
Many cellular and utility providers follow a similar process when determining service eligibility. With a history of missed payments or bankruptcies, your request for service may be denied. At the very least, most providers will require an upfront deposit to ensure against any potential problems.
This is yet another potential headache that can be avoided by building excellent credit.
Many potential employers will request your credit information during the hiring process. Generally, these companies are only interested in obtaining your credit report, which displays detailed information about your credit and payment history. Here again, you can deny their request, but the company will likely find another candidate for the open position.
Although there are no official guidelines on how companies evaluate your credit information, the most widely held opinion is that businesses view the information in your credit report as a proxy for your character. From what I’ve read, an increasing number of businesses believe that a history of poor credit decisions is indicative of future employee performance. In other words, if you aren’t responsible when handling your personal debts, how can the employer guarantee that you will responsibly manage the firm’s resources?
Whether you agree or disagree with this practice doesn’t really matter, because it is perfectly legal and acceptable employer behavior in most states. Unless you reside in one of the few states that have made this practice illegal (California, Colorado, Connecticut, Delaware, District of Columbia (D.C.), Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington) you can expect employers to continue evaluating credit when making hiring decisions.
If you seeking employment and want to avoid any potential problems, you can take matters into your own hands by building and maintaining excellent credit.
Meet Your Credit Profile
In America, individuals have a credit profile that is comprised of two interrelated pieces of information – a credit score and credit report.
A credit score is a numerical snapshot of the information contained within a credit report.
What is a Credit Report?
A credit report is a detailed record of your credit activity and credit history. The private companies that generate credit reports are called credit agencies or credit bureaus (both terms are synonymous).
Although there are a number of smaller credit agencies, three firms dominate the American market. Experian, Equifax, and TransUnion are the major credit bureaus in the United States that account for the vast majority of credit reporting. Each company operates independently and provides a similar set of services.
When you are approved for any type of credit (loan, credit card, etc.), the issuing company (creditor) keeps a careful record of your personal information, payment history, and account balance. Every month the account is active, the creditor sends updated credit information to one or more credit reporting bureaus. Each credit bureau collects and combines the information they receive about your various credit activities into a credit report.
As a result of this process, individuals have a separate credit report created by each credit bureau. Most (but not all) creditors report updated credit information to all three credit bureaus, so the information in each report is usually very similar. There can be slight variations, but major differences are unusual.
After generating your credit report, each private credit bureau sells this information for money. Any time you apply for new credit in the future, the potential lender requests your credit information from one or more of the credit bureaus. The credit bureau then pulls your credit profile and delivers the credit information to the lender (in exchange for a fee). The lender then evaluates your credit information and approves or rejects your request for new credit.
What’s in Your Credit Report(s)?
Each credit report (remember, you have several) contains specific information collected and reported by each credit bureau, including:
Personal Information: Including your full name, date of birth, employment information, current and former addresses, and Social Security number. When you apply for new lines of credit, lenders often ask questions related to your personal information to verify your identity and prevent fraud.
Credit Accounts: Detailed information on all current and previous credit accounts, including creditor names, account numbers, current balances, payment history and account status (including whether or not the account is past due).
Public Records: Information on previous liens, foreclosures, bankruptcies, and certain court rulings.
Inquiries: A list of companies who have pulled your credit report in the past.
A credit report will not include your credit score(s).
Is Information Removed from Your Credit Report?
Some of the information in your credit report is removed after a specified period of time. The reporting period depends on whether the information is positive or negative.
- Open Accounts (with no negative payment history): Remain on your report indefinitely as long as the account is open.
- Closed Accounts (with no negative payment history): Remain on your report for 10 years from the date of closure.
- Late Payments: Remain on your report for 7 years from the original delinquency date.
- Collection Accounts: Remain on your report for 7 years from the original delinquency date.
- Chapter 13 Bankruptcy: Remain on your report for 7 years from the date of filing.
- Chapter 7 Bankruptcy: Remain on your report for 10 years from the date of filing.
- Unpaid Tax Liens: Remain on your report for 10 years from the date of filing. Once paid, the lien will remain for 7 years from the paid date.
- Civil Judgements: Remain on your report for 7 years from the date of filing.
Credit inquiries, which are neither positive or negative, remain on your report for 2 years from the date of inquiry but have a minimal impact on your credit score.
How to Obtain Your Credit Report(s)
Under the Fair Credit Reporting Act (FCRA), you are entitled to receive one free credit report from each of the major reporting agencies (Experian, Equifax, and TransUnion) per year through annualcreditreport.com.
When you receive each report, you should review and verify all of the information therein. If someone has fraudulently stolen your identity, you might find unexpected personal information, credit inquiries, or accounts listed within your report. This information can be removed.
Federal law allows you to dispute any inaccurate information on your credit report, free of charge, and most disputes can be handled 100% online. The Federal Trade Commission provides detailed information on how to dispute credit errors, and the Consumer Financial Protection Bureau provides additional guidance about disputing incorrect information on your credit report(s).
What is a Credit Score?
As was the case with credit reports, individuals have several different credit scores that change on a regular basis.
Each credit score is a snapshot of your current credit profile, based entirely on the information found in your credit report(s). If the information in your credit report changes, your credit score is updated to reflect those changes. For example, if a credit report contains negative information, such as missed payments or unpaid accounts, your credit score will suffer to reflect that information.
Similar to the role of credit bureaus in generating credit reports, a separate set of private corporations generate credit scores in the U.S. These firms use mathematical algorithms (called credit scoring models) to analyze your credit report(s) and automatically generate your credit score(s).
There are a number of different credit scoring models in existence, but the model developed by the Fair Isaac Corporation (FICO) dominates the market. According to the official myFICO website, more than 90% of all lending decisions are made using official FICO scores.
When FICO is not used, the VantageScore model is often preferred. VantageScore was created by the three major credit reporting bureaus (Experian, Equifax, and TransUnion) to compete with FICO, but adoption has been slow and FICO continues to dominate the market.
Both the FICO and VantageScore scoring models use a similar algorithm to produce your credit score, which ranges from 300-850. A higher credit score indicates that you are a responsible and trustworthy borrower, while a lower score is caused by missed payments or other negative remarks on your credit report.
Each credit scoring model (FICO, VantageScore, etc.) will produce one credit score for each unique credit report. If each credit report displays similar information (which is usually the case), each credit score should be comparable.
For example, individuals have three FICO credit scores corresponding to each of the major credit reporting bureaus (Experian, Equifax, and TransUnion). For most people, at most times, all three credit scores will be very similar because each credit report contains similar information.
Although each credit score produced by FICO is highly correlated, you should expect FICO credit scores to differ from those produced by a separate credit scoring model like VantageScore. In each unique credit scoring model, individual credit factors are weighted differently.
If you are overwhelmed or confused by the different credit scoring models, just forget about everything else and focus on nurturing your official FICO credit score.
How is Your Credit Score Calculated?
None of the credit scoring models publish their exact methodology (they are private corporations looking to remain profitable), but FICO does provide a general breakdown of the credit factors that are included in their model. We can use these guidelines to build and maintain excellent credit.
Payment History (35%): Your payment history for all current and historical accounts, including any missed payments or delinquencies, is the most important factor in the FICO credit scoring model because creditors are concerned about your ability and willingness to repay outstanding debts. If you have a history of neglecting existing debt obligations, creditors will be unlikely to lend you money or extend new lines of credit.
Credit Utilization (30%): Credit utilization, also called amounts owed, is the current loan balance for each account as a percentage of the total credit limit. The credit utilization for each individual account matters, but your total credit utilization across all accounts is more heavily weighted in the FICO credit scoring model. Furthermore, revolving lines of credit (credit cards) are more heavily weighted in the credit utilization ratio than installment loans. FICO and VantageScore both recommend that your total credit utilization remains below 30%.
Credit History (15%): The amount of time that each account has been established, including the age of your oldest account, newest account, and the average age of all accounts. A well-established credit history suggests stability and predictability in your borrowing behavior.
New Credit (10%): Your pursuit of new credit, including credit inquiries and the number of recently opened accounts. FICO suggests that “…opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history.”
Credit Mix (10%): A combination of credit cards and installment loans is preferred in the FICO model. I’ll show you how to obtain both types of credit in the next section of this guide.
How to Check Your Credit Score(s) for Free
The Fair Credit Reporting Act (FCRA) requires each of the three major credit bureaus to provide your credit report, free of charge, but it does not require any company to provide your credit score free of charge. Luckily, the market has opened up in recent years and there are a variety of free methods that can be used to obtain your credit score information.
The easiest credit scores to obtain are those generated by the VantageScore model. I’ve personally used Credit Sesame to check my VantageScore for many years (free of charge) and wouldn’t hesitate to recommend their services.
To obtain your official FICO credit scores (which are reportedly used in more than 90% of lending decisions), you have several options:
- TransUnion FICO Score – Only accessible by holding a Discover, Bank of America, or Barclay credit card (I would recommend choosing one that offers a generous signup bonus). No other free options exist.
- Experian FICO Score – Available free of charge through Discover’s Credit Scorecard
- Equifax FICO Score – Only accessible by holding a personal Citi credit card. No other free options exist.
If you don’t hold any credit cards, Discover’s Credit Scorecard is the best free option. However, as detailed in the next section, credit cards are one of the best credit building tools available. By selectively applying for the best cards, you can build excellent credit, obtain a variety of rewards, and access your official FICO credit score at the same time.
How to Build Perfect Credit
At this point in our credit-building guide, you should understand the economic significance of good credit, as well as the relationship between credit scores and credit reports.
Now is the time to discuss the various credit-building strategies that can help you secure and maintain an 800+ credit score. Before we get started, I would recommend that you request a free copy of your credit report(s) and credit score(s) so that you can evaluate your progress over time.
Are You Building Credit From Scratch?
If you have no previous credit activity, you probably won’t have a credit report. Your credit reports are generated after you open your first credit account, as each creditor reports your payment history and account information to the credit reporting bureaus that generate your credit reports.
If you don’t have a credit report, you won’t have a credit score because each credit score is generated using the information in your credit reports. For example, FICO will not generate a credit score until you have six months of credit activity shown in your credit report. VantageScore, FICO’s closest competitor, will generate a score after just one month of credit activity.
If you don’t have a credit report or credit score, don’t worry about it. The remainder of this article will ensure that you have both moving forward.
If you have existing credit, you will want to verify the information in your credit report and check your credit score using one of the free options described in the previous section. If your existing credit history is thin, you can use the suggestions in this article to build credit quickly. If you have existing credit problems, my guide to rebuilding credit will better serve your needs.
Build Credit Using Credit Cards
The easiest way to build credit is by obtaining one or more credit cards, assuming you are able to repay the debt balance in full each month. I wouldn’t recommend applying for any type credit account if you plan on racking up debt, as the astronomical interest charges will negate any potential benefits or rewards.
There are four separate methods that can be used to establish your first credit account, which can (and should) be used in combination. For example, when I first learned about credit, I asked my parents to add me as an authorized user on two of their oldest accounts. By the time college began, my credit reports were established and my credit score reached the upper 600’s. This allowed me to apply for a co-signed unsecured credit card in my second year of college. After using the co-signed account responsibly for six months, I was approved for my own Target retail credit card.
By the time I graduated at age 22, I had years of responsible credit usage showing on my credit report and a credit score of roughly 725. Soon after graduation, I began receiving an endless supply of targeted credit card offers addressed to me.
I began selectively applying for the best cards offering the most generous rewards. By using each new account responsibly and paying the balance in full each month, my credit continued to improve. By the age 25, FICO and VantageScore both indicated that my credit score was approaching 800. And now, at age 28, my credit score very rarely dips below 800.
Once the initial credit building process is complete, very little work is required to maintain an 800+ credit score throughout life.
1) Become an Authorized User (AU)
The easiest way to build credit from scratch is by having a trusted family member add you as an authorized user on an existing credit card account. Anyone can be added as an authorized user (although the minimum AU age varies by card issuer), and the account information is usually reported to all three credit bureaus.
As an authorized user, you will receive your own credit card that looks, feels, and operates exactly like the primary account owner’s card. The difference is that the primary cardholder is legally obligated to pay the debt balance on the account.
Any purchases that you make are included in the primary account, and you are not legally responsible for maintaining any existing debt balance on the account. As a result, you definitely don’t want to be an authorized user on a delinquent account, as that could heavily damage the payment history on your credit report.
I would recommend working out an agreement with someone that you know and trust very much. For example, you could agree to use the card for gasoline purchases only, making sure to repay the primary cardholder for the amount charged every month.
2) Apply for a Secured Credit Card
Becoming an authorized user is a great place to start, but you will not receive the full credit benefit because legally the account is owned by someone else.
Applying for a secured credit card is the easiest way to establish an account in your name. Even if you have no existing credit (or poor credit), most lenders will approve a secured line of credit because the account is backed by an upfront cash deposit.
When a secured credit card account is established, the credit limit is secured by an upfront cash deposit. For example, if you are approved for a $300 secured line of credit, a $300 cash deposit (or $200, or $100, depending on the issuer) might be required to open the account.
You use the secured credit card to make purchases, just like every other credit card. The only difference is that your cash is held as collateral. If you ever fail to repay your debts, the issuing bank will collect your cash deposit and cancel your secured account.
Secured credit cards are designed to build credit. After using the account for 6-12 months, you can apply for an unsecured card with better benefits. Or better yet, some secured credit cards will allow you to convert your secured account to an unsecured option after a specific period of responsible usage.
3) Apply for an Unsecured Student (or Co-Signed) Credit Card
The best credit building option is a traditional, unsecured credit card that offers generous rewards and benefits. However, most traditional credit cards require a credit score above 650, and the best cards often require a score above 700. If you are just beginning to build credit, it’s unlikely that you will meet these requirements, but there are two potential workaround solutions.
If you are a college student, many of the largest credit card issuers offer credit cards designed specifically for students. These student cards offer better rewards than secured cards and have no income limitations or security deposit requirements. Some of the best student credit cards offer the exact same rewards as their traditional, unsecured counterparts.
If you aren’t a student, you might be able to obtain an unsecured credit card of your choosing by applying with a co-signer. When you co-sign, the existing credit of both applicants is considered by the issuing bank, and both parties are legally responsible for managing the account and repaying the debt. It’s a serious decision, but co-signing can be a great option if you have someone responsible that you can trust.
For example, my first unsecured credit card was obtained by co-signing with my parents. They had excellent credit, so the application was easily approved. They didn’t need another credit card, so I managed the account, used the card for occasional purchases, and paid the balance in full. This strategy allowed me to quickly jump from being an authorized user to a full card owner with little credit history.
4) Apply for a Retail Credit Card
If you aren’t a student and you can’t find a co-signer, you can apply for a retail credit card as a potential workaround solution.
Many retail stores offer their own in-house credit card, and these cards are typically much easier to qualify for than traditional unsecured cards. Most retail credit cards are completely worthless, offering very few benefits while charging ridiculous interest rates or fees. The exception is the Target Red Card, which offers a 5% discount on every Target purchase and unlimited free shipping. The Red Card is the only retail credit card that I own.
If you are approved, you don’t have to spend a bunch of money at the retail store. Make a tiny candy or gift card purchase, let your statement generate with a small balance, and then pay the card in full (automatically). Repeat this process for six months and you will have a solid FICO score, which will allow you to obtain more traditional credit cards (and all those juicy rewards).
Build Credit With a Credit-Builder Loan
Credit scoring models like FICO recommend a combination of revolving credit (credit cards) and installment loans (mortgage, auto, student, personal, etc). Establishing both types of credit at the same time will supercharge your credit building efforts.
If you already have any type of installment loan established, you don’t need to open another loan. All you need to do is continue making timely monthly payments to capture the credit benefits.
If you don’t have an existing installment loan, you can accelerate your credit building plan by establishing a so-called “credit-builder” installment loan alongside any type of credit card account. My personal experience, along with the experience of others that I know, suggests that a 30-40 point credit score increase can be realized after obtaining your first installment loan and making a few timely payments.
Meet Self Lender
I’ve personally done quite a bit of research to identify the best credit-builder loans available today. Historically, these loans were made available through smaller banks or credit unions (that is how I obtained mine a few years back) who were interested in helping their existing customers build credit. This is becoming increasingly rare for a variety of reasons.
In my opinion, the best option available today is Self Lender, who offers small installment loans that are both cost-effective and easy to establish online. As an added bonus, Self Lender never requires a hard credit inquiry to establish the loan.
Self Lender offers several different credit-builder loans that vary by the required monthly payment. The most cost-effective option is their $545 credit-builder loan. There are larger loans available, but they won’t improve your credit score any quicker.
Here is how it works:
- You pay $15 upfront to establish the Self Lender account
- One of the Self Lender banking partners (several FDIC-insured banks are available) lends you $545 that is held in an FDIC-insured, certificate of deposit bank account (“CD account”) for 12 months. You cannot access the money during this 12-month window.
- You make one $48 payment per month (for 12 months) to pay down the loan.
- After 12 months, you’ve paid off the loan and the $545 CD is yours to withdraw.
Self Lender handles all of the administrative and credit reporting details for you, which is one of the main selling points, and the entire process will cost you about $46 out of pocket.
- You pay the $15 origination fee + $31 of interest (calculated as $576 in total payments ($48*12) – $545 received after 12 months)
In my opinion, the huge credit score boost is worth far more than $46 out of pocket. Just one credit card signup bonus will pay for multiple Self Lender installment loans.
Build Credit With Rent Payments
All three major credit bureaus (Experian, Equifax, and TransUnion) include rent payment information in your credit report if they receive it. The problem is that many credit scoring models don’t use this information when calculating your credit scores.
For example, the most commonly used version of the FICO scoring model (FICO 8) doesn’t include rental payment information when calculating credit scores. The newer and less established FICO 9 does include rental payment information, as does VantageScore, but these scoring models are rarely used by creditors today. Perhaps in the future, all credit scoring models will utilize rental payment information, but that isn’t the case right now.
There is another problem. The credit reporting agencies include rental payment information in your credit report, if they receive it. Very few rental agreements require the landlord to report your rental activity to the credit agencies. The vast majority of renters will require a third party for reporting purposes, which often charge fees.
For example, RentTrack is one of the largest third-party rental reporting services available. Landlords can (but most won’t) create a portal through RentTrack, where tenants then signup and pay rent. RentTrack records and sends all payment information to each major credit agency, benefitting tenants, while also helping to simplify the rent collection process. The service costs $2.95 per month.
While there is nothing wrong with using rental payment information to build credit, the limited application and ongoing fees make the process inefficient. With credit cards and credit builder loans widely available and easy-to-establish, there is little reason to pursue this strategy for the time being.
Maintain Great Credit With Good Habits
Regardless of your chosen credit building method(s), there are best practices that should be followed. Optimizing the official FICO credit scoring guidelines that I discussed earlier will allow you to establish solid credit habits that will accelerate your credit building plan and help maintain a great credit score throughout life.
- Payment History (35%)
Payment history is the most important factor in the FICO credit scoring model (and every other scoring model), and even one missed payment can have a large negative impact on your credit score.
When you obtain a credit card, you should show purchase activity most months to ensure that your account is reported to the credit bureaus. Neither the transaction amount nor the transaction quantity matter, so don’t feel obligated to make unnecessary purchases.
You should also establish automatic payments from your bank account each month to prevent any type of interest charges or late fees.
- Credit Utilization (30%)
Credit utilization, also called amount owed, is the percentage of available credit being used at any given point in time. For example, if you make a $2,000 purchase on a $10,000 credit limit, you are utilizing 20% of the available credit on that credit card.
FICO officially recommends that you keep your credit utilization below 30% for each individual account, but you will see additional credit score improvements by keeping your utilization below 10%.
There are some interesting nuances in the way credit utilization is reported to each credit bureau, so if you are interested in diving deeper into credit utilization, you’ll find some interesting insights in another recent article of mine.
- Credit History (15%)
Your credit history represents the amount of time that each account has been established, including the age of your oldest account, newest account, and the average age of all accounts.
When you first start to build credit, your credit history will be very short. That is why it’s important to begin as soon as possible.
- New Credit (10%)
According to FICO, opening too many credit accounts in a short amount of time will have a small negative impact on your FICO score, as will having too many recent credit inquiries.
But based on my own personal experience, I don’t think you should be worried about searches for new credit. First of all, hard credit inquiries only impact your credit score for 12 months, and even during that time, the effect is small. If some of your credit inquiries result in new accounts, you will experience a decline in your average age of accounts (a factor in your credit history). But this too is unimportant, because new accounts eventually become old accounts, which will ultimately age your credit history and increase your credit score.
- Credit Mix (10%)
A combination of credit cards and installment loans is preferred in the FICO model. As I demonstrated above, both types of credit are very easily established.
Using the exact methods detailed in this guide, I built an 820 credit score before my 27th birthday. Vanessa followed the same strategies and has equally impressive credit.
By following the rules and guidelines I’ve set forth in this article, I have not doubt that every member of the Cash Cow Community can achieve something similar.
With credit playing a pivotal role in our modern economy, I really can’t think of a valid reason to neglect or ignore your credit profile. It simply doesn’t make sense.
The modern credit scoring system isn’t going anywhere. The only question is whether you’ll pay to play (via excess loan interest, higher insurance premiums, utility deposits, etc.) or be paid to play (via cheaper loans, credit card rewards, cash back, etc.)
The ball’s in your court.