How to Build Good Credit

Wondering why your loan or credit card application was denied? It could be because you have a poor or nonexistent credit rating. This guide on how to build good credit will provide you with an introduction to credit scores and ratings and also teach you the basics of establishing and maintaining good credit.
Tips on How to Build Good Credit
1. It is easier to build a good credit rating than repair a bad one
2. You can access and review your credit report and credit score once a year for no charge
3. Your credit score is a number between 300-850 that lenders will use to determine your credit worthiness
4. Understand how your credit score is calculated and how your activities affect it
5. To build and maintain good credit, always pay your bills on time
6. Start establishing a credit rating early by opening bank accounts
7. Don't charge more on your credit cards than you can afford to pay off each month
Disclaimer

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

Wondering why your loan or credit card application was denied? It could be because you have a poor or nonexistent credit rating. This guide on how to build good credit will provide you with an introduction to credit scores and ratings and also teach you the basics of establishing and maintaining good credit.
Tips on How to Build Good Credit
1. It is easier to build a good credit rating than repair a bad one
2. You can access and review your credit report and credit score once a year for no charge
3. Your credit score is a number between 300-850 that lenders will use to determine your credit worthiness
4. Understand how your credit score is calculated and how your activities affect it
5. To build and maintain good credit, always pay your bills on time
6. Start establishing a credit rating early by opening bank accounts
7. Don't charge more on your credit cards than you can afford to pay off each month
Disclaimer

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here. </note>
Introduction
Your credit rating, credit history and credit score not only determine your interest rates and likelihood of being approved for mortgages and loans, but can also influence whether you'll get hired for certain jobs or qualify to rent an apartment. If you're new to the credit game, you have the advantage of being able to start from scratch and build a good credit rating, which is much easier than trying to repair a bad credit score. Building good credit can take years of demonstrating responsible financial habits, so the earlier you start establishing credit and good credit habits, the better off you'll be.
Step 1: Check Your Credit Report
Before you apply for a credit card, loan, or any other type of credit, you should first check your credit report. Your credit report contains information on your financial history, including what, if any, credit you have been issued, your payment history, and who has made inquiries about your credit habits.Mastercard.com: Credit Reports 101: Your Credit Report & Score Even if you have never been issued or applied for credit, it is a good idea to check your credit report before applying for credit, as it is possible that someone else's credit information has been assigned to you due to an error or case of identity theft.MSN Money: 9 ways to build credit from scratch
In the United States, your credit information and report may be held at one or all of the three major credit reporting bureaus: Equifax, Experian and TransUnion. Once a year, you are legally entitled to a free look at your credit report as it appears at each of the bureaus through AnnualCreditReport.com.Mastercard.com: Credit Reports 101 If you want to access your credit report more often than once a year, you can do so directly through the credit bureaus, but will likely be charged a fee.
Step 2: Understand Your Credit Score
1. The information on your credit report will be used to create your credit score, which is a three-digit number between 300 and 850 that demonstrates to potential lenders how credit-worthy you are.LendingTree: How to build a good credit score Most credit scores are calculated by the Fair Isaac Company (FICO). According to FICO, a credit score above 700 demonstrates to lenders that you are a low-risk borrower, while a score below 600 will likely tag you as high-risk.Mastercard.com: Your Credit Score As with your credit report, you can access your credit score for free once per year through any of the three credit bureaus or directly at FICO's website.
3. Your credit score is calculated using five factors, each of which contributes a certain percentage to your credit score. Once you understand how your credit score is calculated, you will be better-equipped to establish and maintain good credit. According to FICO, the breakdown is as follows:
4. 35% is determined by your payment history—whether you pay your bills on time or are often late. If your payments are late or overdue, your credit score will drop significantlyHowToDoThings: How To Build Good Credit
5. 30% of your score is calculated by comparing the amount you owe to the total amount of credit you have been assigned. If your credit cards are maxed out or close to maxed out, this will reflect poorly on your credit score.Young Money: Can you build good credit with a low spending limit? (November 24, 2005) As a general rule of thumb, you should not be paying more than 15% of your income to creditors aside from your mortgage brokerMastercard.com: Understand Your Score
6. 15% of your credit score depends on how long you have held credit. So, even if you no longer use a certain credit card, you should not necessarily close the account, as doing so will alter your credit ratingMastercard.com: Understand Your Score
7. 10% of your credit score is calculated depending on how many accounts you have opened or tried to open recently. Every inquiry into your credit history will slightly reduce this score, so you should try to avoid opening or trying to open several accounts in a short period of timeHowToDoThings: How To Build Good Credit
8. The last 10% of your credit score is calculated by looking at the different types of credit you hold. Showing that you can manage different types of credit, such as mortgages, loans, credit cards and retail credit proves to lenders that you are responsibleYoung Money: Can you build good credit with a low spending limit? (November 24, 2005)
9. YouTube Video: Tips.Net | Building Good Credit (Time: 3:51)
Step 3: Apply for and Establish Credit
1. Once you are ready to establish credit, there are several ways to go about doing so. Keep in mind, though, that several inquiries into your credit report in a short period of time will negatively affect your credit score. Don't open credit accounts you don't need just for the sake of building credit.LendingTree: How to build a good credit score The most effective way to build credit is to do so slowly and start early.HowToDoThings: How To Build Good Credit
3. Open bank accounts: This is one of the easiest ways to start the credit-building process early. Go to your local bank and open up a checking and/or savings account. Unlike most credit card companies or loan issuers, banks will not require you to be 18 years old to open a bank account. Having established accounts demonstrates stability to future lendersMSN Money: 9 ways to build credit from scratch
4. If possible, apply for credit while you are still in college. Many lenders are more likely to grant credit requests from college students than graduates or working professionals of the same age because they assume that students' parents are more apt to help them with expensesHowToDoThings: How To Build Good Credit
5. If your application for credit is denied, or if you are in a rush to establish credit, consider asking a parent or other established borrower to act as a co-signer on your credit application. This way, your credit will become attached to theirs. However, if you default or are consistently late on payments, this will harm both yours and the co-signer's credit ratingMSN Money: 9 ways to build credit from scratch
6. If you don't qualify for a regular credit card, apply for a secured credit card. To do so, you will have to deposit money with the card issuer and you will be issued a credit card with a limit in the same amount as your depositLA Times: Build good credit, then house hunt (July 27, 20080
7. Apply for credit through a gas station or retailer. It is often easier to qualify for a gas card or store credit card than a traditional credit card; as long as you use these cards responsibly, they'll go a long way towards helping you build a positive credit rating. Keep in mind, though, that these cards may carry high interest rates, so try to pay off your balance each monthHowToDoThings: How To Build Good Credit
8. Get a cell phone. Again, qualifying for a cell phone plan is usually easier than getting a credit card, so getting a cell phone, using it responsibly and paying your bill on time each month will help build your credit history as wellCredit Cards.com: 10 ways students can build good credit
9. Consider taking out a small loan. As mentioned above, your credit score will improve if you can demonstrate that you can handle different types of credit. The two major types of credit are revolving credit (credit cards) and installment credit (loans with set payment amounts). By taking out a small short-term loan with easily manageable payments, you will demonstrate that you can also handle an installment accountMSN Money: 9 ways to build credit from scratch
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Step 4: Create and Maintain Good Credit Habits
Once you have established credit by obtaining a credit card, gas card, small loan, or any combination thereof, the next step is to formulate and maintain good habits when using your credit. It is much easier to establish good habits to begin with than to try to repair your credit report after making mistakes.MSN Money: 9 ways to build credit from scratch
1. Pay all your bills on time. Any overdue or unpaid bill can reflect poorly on your credit report, so be sure to pay your rent, telephone bill, utility bill, and any other bills promptly.Credit Cards.com: 10 ways students can build good credit The easiest way to stay on top of your bills is by being organized: know when your bills are due and contact the issuer if you don't receive your bill on time. When possible, take advantage of electronic payment plansLendingTree: How to build a good credit score
2. Use credit cards even if you don't have to. Just having a credit card is not enough—you must demonstrate that you know how to use it responsibly. Make small purchases on your credit card, then pay the card off before the due dateCredit Cards.com: 10 ways students can build good credit
3. Use your credit cards regularly. If you stop using a card, the issuer may stop reporting the related credit information to credit bureaus or cancel the accountMSN Money: 9 ways to build credit from scratch
4. Don't charge more than 30% of the available credit on a credit card. For example, if your credit limit is $1,000, don't charge more than $300 and be sure you can pay off the amount you've charged when it's dueLA Times: Build good credit, then house hunt (July 27, 20080
5. Avoid using one credit card to pay off anotherMastercard.com: The Basics
Conclusion

Very few people can afford to make large purchases, such as a home or a car, without taking out a loan or a mortgage. Banks are unlikely to approve applicants for such loans if they do not already have an established credit rating. By starting early and using credit responsibly, you can establish and maintain a high credit score. In doing so, you will be ensured lower interest rates and a higher likelihood of approval when and if you apply for a large amount of credit.
References for How to Build Good Credit