Building and Repairing Credit

Financial wellness is achieved through the adoption of habits and practices—like budgeting, saving and spending within your means—to gain more financial freedom and live more comfortably.

One important measurement of financial wellness is the credit score. It’s essential for renting an apartment or buying a car or home. That’s because the activity of borrowing money and paying back on time, month after month over time, gives a landlord or creditor an idea of whether you’ll pay them on time in accordance with the rental or loan agreement.

The lower your credit score, the higher the risk to the lender or owner that you might not pay, so the interest rate they charge may be higher or they may decline your application. The higher the interest rate, the more you pay to borrow the money.

Want to check your credit report and rating? There are three credit reporting agencies (bureaus): Equifax, TransUnion and Experian. In 2023, they permanently extended a program that allows you to check your credit report at each agency once a week for free. There are two different models of calculation: Fair Isaac Corporation (FICO) Score and VantageScore. VantageScore can produce a score with just a month or two of credit history. Visit annualcreditreport.com to request your free copies. Other sites may be fraudulent or charge you a fee.

Here's what makes up your score. The factors that make up your score are: Payment history, amounts owed, length of credit history, credit mix and new credit. Payment history and amount owed are weighted to count 35 percent and 30 percent of your FICO score, respectively.

How do you build credit? Like so many things in life, moderation is key. To build credit, you need to borrow or rent within your means and repeatedly pay on time. Slow and steady is a great rule of thumb for anyone starting out. We published an article on this topic for people who recently moved to the U.S. from other countries, and the same tips apply for U.S. citizens.

How do you repair a low score? The best method is to spend within your means and refrain from adding new debt, while making (at least minimum) payments on time, every time. And even if you pay a credit card or line of credit off, it helps to leave the older ones open since length of credit history is a factor.

These tips may also help:

1. Check your reports for inaccuracies and if you see an error, file a dispute.
2. Bring past-due accounts current. Late payments past 30 days stay on your credit report up to seven years.
3. Set up auto-pay for at least the minimum payment to ensure on-time payments. Make additional payments if you can.
4. Expand your file and get credit for on-time payments of bills like your cell phone, utilities, rent and insurance with the free Experian Boost® program.
5. Maintain a low utilization rate, which is the percentage of all your balances on your credit cards and other lines of credit compared to your total available credit (the limits). If your utilization rate is 30% or more on a single account, paying it down will boost your credit scores quickly. Getting your credit utilization rate below 10% has the biggest positive impact on credit scores. Leave unused accounts open with zero balances because it helps your utilization rate.
6. Ask a trusted financial advisor for help coming up with a plan that you can stick to that will improve your score. The snowball and avalanche methods have helped some people pay off debt and improve their credit standing.