How to build and improve your credit score

How to build and improve your credit score

by USAA
USAA

Your credit score matters.

Those three little digits help financial institutions decide whether to give you a loan and on what terms. The higher your score, the less risky you appear to lenders — and that means you'll pay less interest.

The FICOSee note® score, used by many lenders, ranges from 300 to 850, but there are other scores with a similar point range. All reflect how you handle financial commitments. Knowing what lenders deem risky can help you avoid mistakes.

The FICO score is calculated from these five factors:

  • Your payment track record
  • How much you owe
  • How long you've had credit
  • Whether you're requesting new credit
  • The types of credit accounts you open

Raising Your Score

Made mistakes in the past? The good news is improving your behavior can boost your score:

  • Pay all of your bills on time, every time. That affects a third of your score.
  • Don't carry a credit card balance or, at a minimum, keep it below 25% of the limit.
  • Responsibly manage a variety of debts, such as a car loan, a mortgage, credit cards and student loans.
  • Keep older credit card accounts and avoid opening new ones.

Even if you change bad financial behaviors, improving your history takes time. Late payments remain on your credit report for seven years.

The further you put your missteps in the rearview mirror, the less they hurt your score. If your report is otherwise pristine, a single late payment should stop affecting your score in six to 12 months.

"Your score is a reflection of your overall body of credit work, but it does reflect the notion of 'what have you done — or not done — for me lately,'" says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ with USAA.

Building Credit History

If you have little or no credit history, you'll need to build it.

Retail or gas cards and loans secured by property, such as furniture or a car, tend to be easiest to obtain. Some banks offer secured credit cards for customers who need to establish credit. The cards are secured by a deposit account owned by the cardholder. Most often, cardholders must deposit between 100% and 200% of their desired credit limit.

Another alternative: Consider asking a parent with good credit to add you as an authorized user on his or her card or to co-sign a low-limit credit card application.

 

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