Building Good Credit

Posted: June 21st, 2022
Updated: December 12th, 2024

One of the most essential keys to financial security comes from having good credit. This article will serve as a guide for you to not only improve your credit score, but understand how it works. We'll start by exploring what makes up credit history, define how a credit score is calculated, and provide a handy resource to help you make the most of your finances.

What is a Credit History

When it comes to the world of finance, having a good credit history is essential. One of the first steps to building good credit is understanding what that means. Your credit history is a three digit score (see 'Your Credit Score' below), which many financial institutions use to determine your ability to repay debt. Your credit history can be explored in detail with what is known as a credit report, which includes the following:

Your Personal Information: Details about you, including your name, address, social security number, date of birth, phone numbers, spouses or 'co-applicants', employment (former and current), and any variations of your name and social security number in cases where such may have been incorrectly reported by a lender or entity.
Your Accounts: This is the largest portion of the credit report and contains a detailed summary of your credit accounts and revolving credit. This includes all credit cards, lines of credit, installment and personal loans, mortgages, and so forth. These will be categorized as 'open', 'closed', 'paid', 'refinanced', 'transferred', or 'foreclosed' depending on where the account stands. Past due accounts are reported as such with the number of days past due.
Any Public Records: The public record section includes financial transactions such as judgements, bankruptices, and tax liens, but does not include arrests or misdemeanors.
Credit Inquiries: There are numerous reasons why an organization may request your credit history, and a record of these is kept here. 'Hard inquiries', which are usually requested when applying for a personal loan, impact your credit score, whereas 'soft inquiries', which are simple credit score checks, do not.

Your Credit Score

Your credit score is used to determine both eligibility for loans and the interest rates that you can pay. It is a three digit number that acts as a summary of your financial story and indicates the credit risk you pose to a lender. This score is created using the information contained in your credit report (see 'What is a Credit History' above).

Your credit score is roughly calculated as follows⁴:

Category	Credit Score
Payment History	~35%
Amounts Owed Relative to Limits	~30%
Length of Credit History	~15%
Frequency of New Credit Accounts	~10%
Types of Credit Used	~10%

We will break these categories down for you below⁴.

Payment History	The payment history, as detailed in the 'What is a Credit History' section, determines a score based on how many payments are late, how recent they are, the total of the most recent (if any) delinquency, and total amount owed. Poor payment history is the most common reason for a lower credit score. Fortunately, after seven years, late payments will fall off the credit report, whereas bankruptices will take 10 years. This means that over time, with good credit habits, this score can be improved.
Amounts Owed Relative to Limits	This refers to the ratio of debt versus credit that you have. For example, if you have two credit cards, one with a $500 limit, and the other with a $9,500 limit, you will see negative utilization if your $500 card is maxed out, even if you only have $500 spent on the $9,500 limit card (the latter being considered positive owed relative to limits). This also relates to higher debt and late payments.
Length of Credit History	This category rewards long-time credit holders who pay well. The longer your history of good payments, the better your credit score.
Frequency of New Credit Accounts	The number of newly acquired credit, whether it be in the form of credit cards or new loans, will create a level of concern for your ability to pay the new debt which you have acquired. In the short term, this can negatively impact your credit score, but if you demonstrate good length of credit history on these, it may become a net positive outcome.
Types of Credit Used	This relates to the different kinds of credit and allows lenders to see that you are able to handle varying types of credit. For example, someone who has only ever had credit card debt will not be ranked as highly as someone who has shown good payment history on installment loans, student loans, mortgage loans etc.

A good credit score will provide a better opportunity for you to save money in the future as it will allow you to have access to better interest rates and lower premiums. In short, it will save you money.

Bad Credit Vs No Credit

In the eyes of many major lenders, there is no difference between having bad credit and having no credit. Having no credit history makes you just as high of a risk because there is no way for lenders to determine whether you will pay reliably, even if you have never incurred debt in the past. In this sense, it is a good idea to find small ways to build credit.