Learn About Building Your Credit Score

Understanding What a Credit Score Is and Why It Matters

A credit score is a three-digit number that represents your borrowing history and financial behavior. Most commonly, you'll encounter FICO scores, which range from 300 to 850. The higher your score, the better your financial reputation appears to lenders and creditors. Credit scores matter because they influence major financial decisions in your life, including whether you can borrow money, what interest rates you'll pay, and sometimes even whether you get a job or apartment.

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Your credit score reflects how responsibly you've handled borrowed money in the past. When you borrow money through credit cards, loans, or mortgages, lenders report your payment behavior to credit bureaus. These bureaus compile that information into a credit report, which credit scoring models then analyze to create your score. According to the Consumer Financial Protection Bureau, approximately 26% of Americans have credit scores below 601, which most lenders consider subprime or poor credit. This means more than one in four adults struggles with credit challenges.

The consequences of a low credit score are real and measurable. If you have a fair credit score of 620 instead of an excellent score of 780, you might pay $150,000 more in interest on a 30-year mortgage, according to myfico.com data. Similarly, a lower credit score on an auto loan could cost you thousands more over the loan term. Insurance companies in many states also use credit information when setting rates, meaning a poor credit score could increase your monthly insurance premiums.

Beyond borrowing, credit scores affect housing and employment. Landlords often check credit scores when evaluating rental applications. Many employers also review credit reports as part of their hiring process, particularly for positions involving financial responsibility. Understanding your credit score is the first step toward financial stability because it helps you recognize how lenders and other institutions perceive your financial reliability.

Practical Takeaway: Obtain your credit score from a reputable source like annualcreditreport.com, Credit Karma, or your bank's website. Many banks and credit card companies now provide free credit scores to customers. Knowing your current score gives you a baseline to work from and helps you track progress as you make improvements.

The Five Factors That Build Your Credit Score

Your FICO credit score is built from five major components, each with different levels of importance. Understanding what goes into your score helps you focus your efforts on the areas that matter most. The five factors, in order of importance, are payment history, amounts owed, length of credit history, credit mix, and new credit inquiries.

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Payment history accounts for 35% of your credit score, making it the single most important factor. This means whether you pay your bills on time matters more than anything else. Late payments stay on your credit report for up to seven years, with older late payments having less impact than recent ones. A payment that's 30 days late significantly damages your score, while payments 60 or 90 days late cause even greater harm. If you've missed payments in the past, the damage decreases over time, especially if you've made all payments on time since then. Even a single late payment can lower your score by 100 points or more, depending on your starting score and how late the payment was.

The second most important factor is amounts owed, which represents 30% of your score. This includes your credit utilization ratio—the percentage of your available credit that you're currently using. For example, if you have a credit card with a $5,000 limit and you carry a $2,500 balance, your utilization on that card is 50%. Financial experts generally recommend keeping your utilization below 30% on individual cards and across all accounts. If you have $10,000 in total available credit and you're using $3,000 of it, your overall utilization is 30%. People with excellent credit typically have utilization below 10%.

Length of credit history makes up 15% of your score. This factors in how long you've had credit accounts open and how long ago you used specific accounts. If you've had a credit card for ten years, it helps your score more than a card you opened last month. This is why closing old credit cards can actually hurt your score—you lose that positive history. The average age of your accounts matters, so opening several new accounts quickly can temporarily lower your score by reducing your average account age.

Credit mix represents 10% of your score and refers to having different types of credit accounts. The scoring model looks at whether you have experience managing credit cards, installment loans (like car loans), mortgages, and other types of credit. Having only credit cards suggests you haven't demonstrated responsibility with different lending types. However, you shouldn't open new accounts just to improve your mix—the impact is relatively small compared to other factors.

New credit inquiries account for the final 10% of your score. When you apply for credit, lenders perform a hard inquiry on your report, which temporarily lowers your score by a few points. Multiple hard inquiries within a short period (typically 14-45 days, depending on the scoring model) for the same type of credit count as one inquiry. However, checking your own credit report doesn't impact your score—this is a soft inquiry.

Practical Takeaway: Focus first on always paying bills on time, then work on reducing credit card balances. These two factors make up 65% of your score and are within your direct control. Track due dates using calendar reminders or automatic payments to prevent missed payments, which are the hardest to recover from.

Steps to Build Credit from Scratch or Rebuild Damaged Credit

If you have no credit history or a damaged credit history, rebuilding takes time and consistent action. Most people can see measurable improvement within 3 to 6 months of responsible behavior, though significant improvement typically takes 12 to 24 months. The timeline depends on what damaged your credit and how severely, but the direction of your progress matters more than the speed.

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For people starting with no credit, the first step is establishing credit history by opening accounts that report to credit bureaus. A secured credit card is an effective option for those who can't qualify for traditional credit cards. With a secured card, you deposit money into a savings account, and the credit card company gives you a credit line equal to that deposit, usually between $200 and $2,500. You use the card like a regular credit card, and the company reports your payment activity to the credit bureaus. After 6 to 18 months of on-time payments, many issuers convert secured cards to unsecured cards and return your deposit. Discover and Capital One are two major issuers offering secured cards.

Another option for building credit is becoming an authorized user on someone else's account—typically a family member with good credit history. When you're added as an authorized user, that account's payment history may appear on your credit report, which can boost your score if the account is in good standing. However, if the primary account holder misses payments, your score suffers too, so this strategy only works with responsible account holders.

For those rebuilding after damage, the primary focus should be establishing a pattern of on-time payments. Set up automatic payments for at least the minimum amount on all accounts. Better yet, pay more than the minimum to reduce your balance faster and lower your credit utilization ratio. If you've had late payments, bringing any past-due accounts current should be your immediate priority. An account that's currently 30 days late, if brought current, is less damaging than one that remains delinquent.

Debt consolidation may help some people. If you have multiple high-interest debts, consolidating them into a single loan with a lower interest rate can make payments easier to manage and reduce your utilization ratio. However, consolidation involves a hard inquiry and a new account, which temporarily lowers your score before improving it long-term.

Monitoring your credit report for errors is also important during rebuilding. Federal law allows you to obtain free credit reports from each of the three major bureaus—Equifax, Experian, and TransUnion—once yearly through annualcreditreport.com. Check these reports for errors such as accounts you didn't open, incorrect payment histories, or fraudulent activity. Dispute any errors you find, as correcting them can improve your score.

Practical Takeaway: If you're starting from scratch, open a secured credit card this week and use it for one small recurring charge like a streaming subscription. Set up automatic payment of the full balance. If you're rebuilding, list all past-due accounts and contact creditors to bring them current, starting with