Having a good credit score is something that will save you thousands of dollars over the span of your life. It will impact every single large purchase you make from buying a car to a home. Every high school, if not every all college should cover the basics of building credit. Personally, if I’m being frank, this information was way more usual in real life than some of the general education courses I had to take. Regardless, I get questions about how to build good credit and what a credit score is composed of so I figured I’d break it down here for all of you.  

Before we dive into what makes up a credit score, we should clear up the difference between a credit report and a credit score. A credit score is an algorithm that measures your credit risk based off your credit report at a point in time. So your score can vary a little from one day to another. There are three national credit reporting bureaus (Experian, Equifax, and TransUnion) where you can check you score at each one, once per year for free. Personally I like to just check mine once every 3 – 4 months and just rotate through the three different bureaus, this way I can catch any errors and inconsistencies between the three.

Now that we have that cleared up, let’s cover what exactly goes into a credit score:

• Payment history takes a look at your monthly payment history patterns and if you have ever defaulted on any loans. The best way to improve this area is to have consistent, timely payments.

• Credit history is literally how long have you had lines of credit open. For us #millennials, this can be an area that drops our score if we have had not any open lines of credit to show over a long period of time. The good news is, as long as you develop good habits when it comes to managing credit, this one will only help you in time.

• Credit utilization adds up all of the lines of credit, from your credit card to your student loan to your mortgage and compares the amount credit you have available to the amount you are using. This is where having a credit card with a ridiculously high credit limit can come in hand, but only if you are responsible enough not get anywhere near maxing out that card.

• Types of credit looks at the different credit lines you have open. Typically it is good to have blend of different types. Some examples are credit cards, an open line for a leased car, a student loan, or a mortgage.

• New credit refers to any new lines of credit that have been opened. This is why it typically not great to open a bunch of credit lines over a weekend, as this typically hints toward financial trouble. General rule of thumb is to only take on additional credit when it is needed.

So how do you go about starting if you don’t have any lines of credit open? First off, do not open a bunch of new lines all at once. Best to do this over time. I personally began by signing up for a credit card through my primary bank. I like to wait about a year between opening new lines of credit, but that is just a personal preference. Prior to signing up for my credit card, I had several other forms of credit like my student loans and leased car payments. So right there I checked off my credit diversity box.

If you are on the other end of the spectrum and have many lines of credit open, or are in credit card debt, you may want to look into consolidating those lines of credit in order to make it a bit more manageable. In a later post I will walk through best practices when it comes to managing credit card debt.

Now that we have covered the basics, let’s jump into developing some good credit habits. I recommend throwing some small monthly recurring charge, like a Netflix account, on a credit card and just having an automatic payment set up to pay the card off in full every month. This way you never have to worry about paying off that credit card and it is all managed in the background. As long as your card is paid off every month, you will never have to worry about the insane interest rate that is associated with your credit card. This will also tick off the low credit utilization box, help you build a reliable payment history, and if you keep this line of credit open for a while you can tick off the credit history box. And well there you go a simple plan to building up that credit score.