How to Build Credit
Your credit score is a large part of any credit application.

Submitted by ltownsend on February 22, 2022

Consider it the basic building block for determining your qualification and risk—your credit score. When you apply for a new loan or credit account, your score will help determine your interest rate, loan amount and terms. The lower your score the harder it will be to get the lowest rate or the most favorable terms. Monitoring your credit score is important to ensure you have the best opportunity for receiving the credit you desire. 

Categories of Credit

Lenders categorize groups of credit scores that represent different borrower risk levels.  They are:

  • Deep subprime (credit scores below 580)
  • Subprime (credit scores of 580-619)
  • Near-prime (credit scores of 620-659)
  • Prime (credit scores of 660-719)
  • Super-prime (credit scores of 720 or above)

If you are in the prime and super-prime credit categories, you have the best opportunity for getting the lowest available interest rate and loan terms.

Build Your Credit Score However, if you have less-than-stellar credit, you may be classified as someone who is "subprime," or “deep subprime.”  A subprime credit score can make it more difficult to qualify for a credit card or loan. And you’ll likely end up paying a higher interest rate for the card or loan.

Subprime borrowers sometimes must take additional steps to be approved for a loan. For example, a cosigner with good credit can improve your chances to qualify. However, he or she is responsible for payments if you default on the cosigned credit card or loan. If you’re buying a home or a car, the lender may require a higher down payment than it does for a prime borrower.

How Can I Improve My Credit Score?

Moving from the subprime to prime credit score category has distinct benefits that put you on the path to a brighter financial future. You may be able to buy a home instead of renting. If you lease, you’ll have a better selection of properties to choose from. You’ll have lower interest rates on everything from your mortgage to your car loan to your credit cards, which means you’ll spend less money on monthly payments and more to put toward repaying debt, savings and meeting other financial goals.

Here's how you can improve your score:

  • Check your credit report and score. If you don’t know where you stand when it comes to prime vs subprime credit, you can’t be able to take steps to boost your rating.
  • Check your credit report for errors. Dispute any inaccuracies on your credit report that could be affecting your score.
  • Pay your bills on time. Set up automatic payment reminders through your financial institution or on your phone or email calendar. You can receive a text or email so that you never miss a payment, helping you avoid late fees and dings to your credit score.
  • Keep your debt-to-credit ratio low. Pay down some of your debt to improve your credit utilization ratio. Lenders like to see borrowers using no more than 30% of your available credit.
  • Raise your credit limit. If you’re able to do so, opening a new line of credit, or increasing your credit limit on an existing account, will improve your utilization and subsequently, your credit score.
  • Bring past-due accounts current. If you’ve missed payments in the past, bring those accounts current to improve your account standing, especially if some items have gone to collections. Once that happens, the black mark will remain on your credit report for seven years even if you eventually pay.
  • Establish a history of good credit. Keep old accounts open. The length of your credit history contributes to a healthy score, so even if you’re no longer using a card you should avoid closing it.
  • Maintain a good credit mix. An ideal mix includes a both revolving and installment credit. If you only have credit cards and no installment loans (e.g., a car loan), consider opening a small personal loan or secured loan to add to the mix. Having different types of loans demonstrates your ability to manage different types of credit.
  • Limit frequency of credit applications. Avoid applying for too many accounts in a short period of time. Lenders may see this as a red flag and the resulting hard inquiries have a negative impact on your score.
  • Create a budget. Determine your income, expenses, and ways you can pay down your debt. This not only boosts your score but also puts you on track to reach other financial goals—like building an emergency savings fund.

If you find you have more credit obligations than you can currently handle, consider negotiating balances due or defaults by communicating openly and honestly with your creditors. They can help you by arranging payment schedules you can manage. Also, check out Consumer Credit Counseling Services (CCCS) for financial guidance. CCCS is a nonprofit organization that can help you find workable solutions to financial problems by offering services such as financial education, budgeting assistance and debt management plans. 

To make it easy to monitor your credit, you can sign up for a credit score monitoring app (e.g., ExtraCredit and Mint). Remember to be patient; repairing bad credit is no quick fix. If you remain steadfast and determined, following these steps will result in an increased credit score and better financial opportunities in the future.