Updated April 24, 2019

10 Smart Ways to Build Credit

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Credit is critical. There is no confusion on this point. With good credit, the window of opportunity is wide open. When one person – the banker down the street or the credit card issuer who OK'd your online application – gives you financing, everything that comes afterward will be easier and cheaper, as long as you use the trust you've been given wisely.

Prove yourself to be creditworthy and you'll be able to get the best terms and interest rates, which will save you money when it's time to buy a car or get a mortgage. Here's how to build a stellar credit reputation so that you can continue to get good credit opportunities down the road.

1. Open a bank account

A bank account in and of itself may not appear on your credit history, but it certainly helps when you're on the hunt for credit. In fact, creditors will ask whether you have a bank account. If you answer no, this may raise a red flag about whether you are financially responsible.

2. Start slow

When you're applying for credit, be picky. Applying for too many cards at once shows up as a negative on your credit report. Consider starting with department store or gas credit cards because they are typically easier to get. If that assumption proves wrong for you, then you might need a secured card, which comes with limitations - including a tight credit limit - but is designed for those who need to build or rebuild their credit history. This is the time to research the type of card that is right for you by comparison shopping and figuring out which type of card fits your needs and spending patterns.

3. Know what counts

Before you build your credit, you have to know the basics of what comprises a credit score. Here's the lowdown on FICO: 15% of the score is based on the length of your credit history; payment history makes up 35%; amounts owed are 30%, type of credit used is 10%; and the last 10% is new credit. This data is culled from your credit report. What doesn't really matter for your credit score is your age, occupation, and marital status.

4. Check your credit report

It can't be overstated how important your credit report is. You want to get your credit report from all three bureaus, Experian, TransUnion, and Equifax, because each may present you a bit differently. You're entitled to a free report from each bureau once every 12 months. See what is being said about you. Does it show that you have a history of late payments? Is your debt-to-income ratio off the charts? Most importantly, are there mistakes? If so, immediately work to correct them by contacting all three credit bureaus and sending them your version of the Federal Trade Commission's credit-report dispute letter.

5. Make amends

What's done is done, so don't wallow, but do take action. If an account has been reported as past due, work towards bringing that account up to date as quickly as possible, and vow to not fall behind again.

6. Pay on time, always

Paying on time is the big kahuna when calculating your credit score. No one wants to give credit to chronic late payers. Make it easy on yourself by automating payments. Or at least keep a running list of all the bills you coming due and check them off as you pay them, so you never lose track.

7. Go above and beyond

It's not enough just to pay on time; if you want another gold star, go above and beyond what is required. In other words, don't just pay the minimum due. Not only does this work in your favor as you can dramatically reduce the amount of interest you'll pay during the time you have that card, but it says you are creditworthy indeed.

8. Respect boundaries

Realize that a limit is a limit. If your creditor says you're finished at $5,000, that's it. Don't try to charge $100, $200, $300, or more beyond that. When you go over the limit, especially if you make a habit of it, you're telling creditors a lot about you - that you're not responsible, probably not to be trusted, and therefore a real risk. Good luck going back to that source for more credit.

9. Less is more

Staying within your limit is a good thing, for sure. However, not using all the credit you have available to you is sweet too. Ideally, strive to keep your credit utilization ratios at 30% or lower, meaning you do not use more than 30% of your credit limit per card. When you're not using up all the credit you could, you look like you're conscientious and on top of your game, and your credit score will reflect that image.

10. Just say no carefully

If you've had trouble managing your credit cards in the past, you may think closing your accounts would be a smart move. But the fact is, creditors actually like when you have some credit available to you, and they are bothered if you suddenly close a bunch down. They don't want to be foolish and give you credit when it looks like - on paper, at least - no one else is doing it. But if you feel you're using your credit cards as a crutch or as a way to spend beyond your means more often than not, then hide them until you've paid off what you owe and you've smartened up about how to use them properly.

Sheryl Nance-Nash is a journalist at CreditDonkey, a credit card comparison and reviews website. Write to Sheryl Nance-Nash at sheryl@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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