What Builds Good Credit?: 4 Steps to a Good Credit History

what builds good creditIf you have less than perfect credit you can probably figure out what caused it. But what exactly builds good credit? Unless your parents, a guardian or mentor taught you about credit you probably do not have a clear understanding of what builds good credit.

Credit education should be a required course before teenagers graduate high school since so much of personal finance revolves around credit.

You may know it’s important to have good credit. But, there’s still a lot of confusion about how to actually build good credit report.

Most consumers are aware of the information contained in a credit report and that there are three major credit bureaus — Equifax, Experian and TransUnion. The “big three” credit bureaus collect, organize and sell the information contained in credit reports to businesses so they can determine your creditworthiness.

A credit report basically contains your credit history including applications for credit, public records such as tax liens, judgments, bankruptcies or foreclosures. But the most important information in a credit report is your bill paying history.

Banks and lenders want to know how you pay your bills. In fact, if you do not have at least 6 months of bill paying history, most credit scoring models cannot even generate a credit score.

So what builds good credit? According to the Consumer Financial Protection Bureau, the following actions build good credit:

Pay your bills on time, every time. An automatic payment from your bank can be a good way to do that, but make sure you keep an eye on your balance so you always have enough in your account to cover the payment. You don’t want it to bounce.

Don’t get too close to your credit limit. Credit scoring models look at how close you are to being “maxed out” on credit cards. If you use too much of your total credit lines, say by carrying big balances, you can hurt your credit score. Experts advise keeping your use of credit at no more than 30% of your total credit limit – some even say you should keep it at less than 10%.

Don’t apply for too much credit in a short time. Your credit score may go down if you apply for or open a lot of new accounts in a short time. Buying something and want the discount that comes with opening a new store card? Transferring balances from an old card to a new one? Do that very often and it will show up on your credit report as lots of new credit accounts, which is likely to hurt your credit score.

The more extensive your credit history, the better. Credit scores are partly based on experience over time. The more evidence you have on how you get and pay for credit, the more information there is to determine whether you are a good credit risk.”

Building and maintaining good credit is a major part of overall financial stability. Not only are credit cards, loans and mortgages determined by a good credit history, employment and even security clearances can depend on good credit.

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