How to Build Good Credit

Tips to build your credit score no matter how high or low your score is—because there's always room for a higher score!

Do you have bad credit? Are you worried about not being able to increase your credit score? That’s okay! First and foremost, we’re here to tell you that everyone has access to a complete financial plan. We will help you find financial wellness—no matter what your credit score, bank account statement, or your student loan balance. After all, everyone deserves to feel financially secure.

First thing’s first. Do you know what a credit score is? Before we dig into how to build your credit score, let’s start off with the basics of what your credit score is and why it’s important that you have a good credit score.

What is a credit score?

Your credit score is calculated based on your:

• Payment history—i.e., paying your loans on time

• Credit utilization—i.e., the percentage of your available credit compared to how much you are using. Consistently maxing out your credit cards will typically decrease your credit score. No bueno.

• Length of credit history—how long you have had your credit accounts opened. For the most part, the longer you have your accounts open, the better your credit score will be.

• Applications for new credit—Applications for credit cards and loans can ding your credit about 5 points each. Each time you apply for a new credit card, that’s a ding.

Do you know your credit score? If so, great, you’ve nailed the first step! If not, we recommend keeping tabs on your credit report and your credit score to keep your credit score nice and healthy and notice any fraudulent or accidental dings. (Note: if you notice anything odd with your credit score, contact the relevant credit agency.)

Why do you need good credit?

As you may know, credit impacts every step of borrowing, from buying or renting a home, to buying or leasing a car, to borrowing money for other personal reasons. It doesn’t matter the reason you’re asking to borrow money; lenders will review your credit score before they decide to let you borrow money. Why? They want to be sure you’re a reliable borrower and that they can trust you’ll pay them back.

With better credit, you’ll reap many benefits. You can earn better interest rates on loans, mortgages and credit cards; have a better chance of being approved for new home or auto loans; and get lower premiums on insurance.

If you’re reading this, you’re likely aware that having lower credit presents plenty of obstacles, from higher interest rates to low likelihood of getting approved for loans. We don’t have to belabor this point, because you’re likely experiencing these pains. That said, it’s important to remember that if you don't boost your credit, these problems only escalate over time. But, don’t worry! That’s why we’re here to help.

When should you build your credit?

Ah, yes, young grasshopper. You should build your credit as soon as possible. New to the credit world? No problem! Now is a great time to get started. And, if you’re not new to the credit game but need some credit improvement, it’s not too late! Despite what some predatory lenders or misinformed friends and family members may have told you, it’s never too late to build your credit score (see: Top Myths about Credit).

How to build good credit from the get-go

This first step is easy-peasy—well, on paper, at least. The first thing you should do if you’re trying to build your credit is to spend within your means. Not borrowing extra money means not owing extra money.

Next, pay all of your bills on time. This is part of spending within your means. If you’re spending money that you have, again, you’re not going to overspend or over-borrow and find yourself in trouble later.

Keep your credit card balance to a minimum. Again, this harkens back to spending within your means. If you’re not charging lots of money on your credit card, you won’t owe lots of money at the end of the month. This also means paying off your credit card each month—the full balance for the previous month, not the minimum balance.

Limit new credit card applications. Each time you find yourself at the J Crew counter or when you’re cashing out at Home Depot, the cashier will ask if you want to save X percent and open a store credit card. This is a trap! When you open a store credit card, you must know that the retailer wins, not you. Opening yet another credit card will not solve your problems, but only increase your cash owed in yet another place. Even though you’re making your money harder to track for yourself, lenders are well versed in this game; you’re not hiding anything!

Build long term credit history. Remember, your credit score is essentially a grade that shows lenders how well you can borrow—and pay back—money. The longer you keep your credit cards open, while paying off your debt, the better your score.

Building your credit score will set you up for success. With a higher credit score, you’ll get approved for a loan more easily, you’ll be able to rent that apartment or buy that house without issues, you’ll be able to lease or buy that car you’ve been needing and, ultimately, you’ll achieve a higher sense of financial wellness.

We believe in the power of financial wellness. We’re believers that holistic health and wellness includes financial wellness. When you set yourself up for financial success—and, yes, that means having a strong credit store, spending within your means, paying off your bills on time, and having a good sense of where that next dollar should go—we believe you will find yourself happier, healthier and on the right track.

Find more resources to get yourself on the path to financial wellness—see: How to Set a Budget, Where Does the Next Dollar Go, Top Myths about Credit, How to Pay Off Debt When Cash Is Tight, Free Financial Wellness Check-Up and, of course, don’t forget to download the Pocketnest app.