Tips on Building My Credit

Building your credit is a long-term process, but it is a critical part of getting good terms on future borrowing. Your credit score is based on the information found on your credit report and affects whether you qualify for new loans, such as a car loan, mortgage or credit card, and the interest rate you pay on your debts.

Educate Yourself

If you don't know what goes into your credit score, you have no idea where to start when building your credit. FICO, the company that calculates the credit scores that most lenders use, lists the components that factor into your score and their approximate weights in the calculation. About 35 percent of your score is based on your payment history, 30 percent on amounts owed, 15 percent on length of credit history, 10 percent on new credit and 10 percent on types of credit.

Start Early

The sooner you start building credit, the better. Your score will be low at first because it is not based on much, but as you develop a positive payment history and a longer credit history overall, your score will increase. College students can start by getting a joint credit card with a cosigning parent or an individual credit card by proving sufficient income. An auto loan on an inexpensive used car is another good way to build credit. By the time you are ready to buy a home or a new car, you will have built your credit so you can get a better interest rate.

Pay on Time

One late payment stays on your credit report for seven years, and although its effect on your score lessens as you make on-time payments, save yourself the trouble by not missing the payment in the first place. Most lenders allow you to sign up for automatic payments, which keeps you from ever missing a payment.

Watch Utilization Ratio

Your utilization ratio, or the amount you are currently borrowing in comparison to your credit line, contributes toward the amount-owed portion of your credit score. Maxing out a credit card makes its utilization ratio 100 percent, which affects your score negatively. A lower utilization ratio is much better; Bankrate.com recommends keeping it under 40 percent and MSN Money recommends using 30 percent or less of your available credit, with 10 percent as an ideal target.