Q&A: How to Build Great Credit

Question: I want to build great credit. What should I do?

Answer: It takes some time and patience, but it's well worth the effort. Those who have excellent scores get the best rates for mortgages, personal loans, and cards. You'll also get better rates for health insurance, car insurance, and more.

Here are a few things you need to do to make sure you're on your way to excellent credit.

Pay all of your bills on time

The pathway to an excellent score starts with paying all of your bills on time. That means you pay your cell phone and utility bills on time and not just your credit cards.

The reason this is so important? Your payment history makes up 35 percent of your FICO score and that's a big chunk. So make this a priority. Set up reminders or automatic payments for some of your bills. Do whatever it takes to pay bills on time.

Before long, paying your bills on time will become a lifelong habit. And this is the kind of habit that will lead you toward a life of financial health.

Don't owe a lot on your cards

Another important step besides paying your bills on time is to keep low balances on your cards. The amount you owe accounts for 30 percent of your FICO score. The amount of credit you've used compared to the amount of credit you have available is known as the "credit utilization ratio."

The most common advice is to keep your ratio below 30 percent. But if you want to improve your score as quickly as possible, you need to keep the ratio below 10 percent.

Keep in mind that it's also important to keep a low balance on each card. Your score will benefit the most if you have low utilization ratios on each card and a low ratio across the board (when all of your cards are considered together).

Don't apply for a lot of new cards at one time

Each time you apply for a credit card, your score takes a tiny ding. For some, it might be only 1 point or maybe none at all, depending on the specifics of your credit profile. For others, though, the amount knocked off could be as high as 5 points.

So don't apply for cards you can't qualify for. If you have an average credit score, you're unlikely to get approved for a card that targets those with high scores. Be mindful when it comes to choosing the best card for yourself, and if you do want more than one card, spread out your applications so you don't get a big hit to your score at one time.

Sometimes, it's only a few points that separate you from, for example, fair credit and good credit. This can make a difference in the rates and terms you get when applying for loans, such as a mortgage. So make sure you think about this before you apply for credit.

Check your free reports for errors

You are entitled to free reports from each bureau--Equifax, Experian, and TransUnion--every 12 months. You can get your reports at AnnualCreditReport.com. A significant error on one of your reports could bring down your score. It's a good idea to get a report from each bureau every four months so you can keep an eye on your reports throughout the year.

When you get your reports, review every line item and look for errors or for signs of identity theft. If you see an account that you didn't open, this is a red flag. Someone might have opened an account using your personal information. And even if you see errors in your personal information, follow through and get these fixed. Errors like these can result in "mixed files," which can cause someone else's file to get switched with yours. So you could end up with negative items in your file that don't belong to you.

If you find errors in your reports, follow the steps outlined by the Federal Trade Commission (FTC) in Disputing Errors on Credit Reports.

Check your credit score for free

You can keep tabs on how you're doing credit-wise by using LendingTree's free credit score. Now, this isn't a FICO score so it's not the score that lenders will see. But this free score will give you an idea of how your credit life is going and what you need to improve upon. You'll get grades on different factors, such as payment history. You can check this score every month and get a very good idea of how much your score has improved.

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