Credit is the ability to borrow money or access goods or services with the understanding that you’ll pay later. This service isn’t free. You are charged interest, a percentage of the amount you borrow, when you use credit. Lending services rate your credit according to how well you repay what you borrowed as well as other criteria (shared below).

It is important that you pay your credit card bills and loans on time to build good credit. If you are late on credit card and loan payments, it detracts from your credit rating. Good credit allows you to borrow money for cars and homes at good interest rates. Bad credit makes it more difficult to get loans, or you may have to pay higher rates of interest.

So how do you build good credit?

If you have a credit card or loan, information about your spending and repayment patterns is already being sent to credit to the three main credit reporting bureaus (Equifax, Experian, and TransUnion). Each time you apply for new credit, at least one of those agencies sends a report with details of your credit history. They also calculate a credit score. A higher score is an indication of an individual who manages credit wisely. Here are a few tips to get, and keep, a high credit (FICO) score:

  • Make your payments on time.
  • Stay within your credit limits. Ideally the total amount you borrow should not be more than 30% of your income. Lenders look at how much credit is available to you, and how much you are actually using.
    • A good rule of thumb to keep in mind: if you can’t pay for it now, ask yourself if it’s something you really need, or is it just something that you want. If it’s a want and not a need, then the purchase may needlessly put you deeper in debt.
  • Avoid having too many credit cards. When your credit score is computed, if you have too much credit available to you, it can be seen as a risk.
  • If you choose to close a credit card, make sure your credit report indicates that you, the customer, requested it to be closed.
  • Check your credit report once a year. Everyone is entitled to one free copy of their credit report from each of the three agencies each year. In addition, if you were denied credit recently, you have the right to a free copy of your credit report even if you already received a free copy that year. Review your credit report and make sure there are no errors. If you do find any errors, you need to contact all three credit bureaus and have them corrected.