6 Ways to Help Build Your Credit

If someone asked for driving directions but couldn’t tell you where he was starting or where he was headed, could you help? Of course not. And yet many consumers don’t know what credit score they need to get a loan, or even where their credit score currently stands. For example, the average credit score to get a new car loan is usually higher than for a used car—and your score affects not only whether you get the loan but what interest rate you pay. Do your research. Then find out what your credit looks like now.

There are three major credit reporting companies – Experian, Equifax, and TransUnion – and you’re entitled to a free report from each once a year. You can request a report from the FTC-approved AnnualCreditReport.com.

You can also monitor your credit with American Express^® MyCredit Guide. MyCredit Guide is a free service that allows you to view your FICO^® Score and Experian^® credit report. (FICO is a registered trademark of Fair Isaac Corporation in the U.S. and other countries.) Once you enroll with MyCredit Guide, your credit score and credit report will be available for free to view at any time. You’ll also have access to tools like FICO^® Score Simulator and FICO^® Score Planner to help you build positive credit habits that support a healthy credit score.

Next, review your credit report. Carefully. Credit reports are not infallible, so look for debts that are not yours, outstanding balances that you believe were paid, and other errors. You can dispute anything that you believe is incorrect. But be aware that open (unresolved) disputes can work against you when applying for a mortgage.

About 30% of your FICO score is based on your amounts owed.¹ That portion of the score considers two things: The total you owe and the portion of your available credit that is used. Paying down balances takes action on both.

A key best practice for building credit is to go beyond just making the minimum payment. It’s better to pay as much as you can, as often as you can. If raising your credit score is your top priority, you may wish to consider a second job or side gigs to give you more income. The faster you can get to zero balances the better.

But if you pay for everything with a credit card and get close to, or hit, your limit before paying off the full card balance each month – as people who use rewards cards sometimes do – consider paying twice a month instead of once. Otherwise, your credit report may consistently show you at your credit limit, which impacts your score.

That “portion” of your available credit that’s used up is called your “credit utilization rate.” This directly contributes to your amounts owed, mentioned above. According to FICO, maintaining a low credit utilization ratio can positively affect your credit. One way to do this is by using a low percentage of your available credit limit on revolving accounts, like credit cards. Or, you can focus on paying your balances more often than once a month.

When a bill is 120 days past due, the creditor can turn it over to a collection agency or debt collector. Collections almost always negatively affect your credit score, and they remain on your credit report for seven years. The good news is that your FICO score weighs collections by how recent they are; the older the collection, the less it will hurt your score. 

According to FICO, whether to pay off collections is a personal decision that could cause your credit score to increase, decrease, or have no affect – it depends on the individual.² However, paying off collections can improve creditworthiness if you’re trying to get a loan or other credit product. Therefore, it’s often a good idea to pay off a collection account even if it won’t have much of an effect on your credit score.

Until recently, only borrowing (and repaying) could really help your credit. But now some services will give you credit for other bills you pay. With some caveats, for example, Experian promises an “instant” boost to your score by reporting payments to your utilities and phone company that you may not otherwise get credit for.³ Other services similarly report rent payments.