Building good credit is a key component to maintaining financial health, and higher credit has many advantages, including lower rates on loans and credit cards and favored status when applying for housing or utilities.

There are several ways to build and maintain a good credit score from scratch, but before we talk about that, it helps to understand how a credit score is calculated.

A credit score is made of several components, and it plays a significant role in how lenders calculate your risk of being able to pay your debt. You may have heard about one of the most widely-used types of credit score – FICO score. A FICO score is a three-digit number typically ranging from 300 (poor credit) to 850 (excellent credit). Three major credit reporting agencies – TransUnion, Experian, and Equifax  – calculate various versions of FICO scores, and depending on the information contained in your credit report at each of these agencies, the score may or may not be the same across each agency.

Payment History. This makes up the biggest percentage of a FICO score at approximately 35%. Whether or not you pay your debts off on time will reflect in your credit score.

Amounts Owed. If you’re utilizing a high percentage of your available credit (like carrying a high balance on your credit cards), that will negatively impact your score. This makes up about 30% of a FICO score.

Length of Credit History. How long you’ve had a credit history, the average age of your accounts, and how long it’s been since you’ve used various accounts will factor comprise about 15% of a FICO score.

Credit Mix. A FICO score also takes into consideration the variety of credit accounts you have – such as credit cards, loans, retail accounts, and mortgages, to name a few. This makes up around10% of a FICO score. 

New Credit. The last 10% or so of a FICO score factors in how many new credit accounts you have. Opening several new accounts within a short time may negatively influence your score. 

If you are wise, you can build good credit over time, or even resurrect a poor credit score. It takes some planning, patience, and good decision making, but it’s well worth the effort. Here are some smart steps to set you in the right direction.

Be picky about who you bank with. When looking for a bank, it’s important to consider the range of services they offer. Things like online banking, mobile deposit, credit cards, home and auto insurance options are important things to look for, but there are a few other things to consider – banks are usually for-profit institutions, while credit unions are nonprofit and member owned. Credit unions can generally offer lower rates on loans, fewer fees, and have higher interest growth rates than banks because they’re not concerned with meeting profit margins for shareholders. Finding a bank that caters to the specific needs of service members is a great bonus. Navy Federal Credit Union is a service member focused institution with amenities like nationwide branches and ATMs, mobile banking, auto, home, and student loans, and a variety of options for opening personal accounts and credit cards. 

Choose the right credit card. Getting a credit card can be a great way to build your credit, as long as you’re paying it off on time, not carrying a high balance, and not purchasing more than you’re able to realistically afford. Before you open a credit card, whether through your bank partner or a retail establishment, it’s smart to consider a few key things. What is the interest rate (APR) on this card? What kind of credit limit can I realistically get? Are there any fees attached to this card?

A great first credit card is one with cash back rewards and zero annual fees, like Navy Federal’s CashRewards credit card. The CashRewards card has 1.5% cash back on purchases, no fees (including balance transfer or cash advance fees) and comes with free credit monitoring. The APR for balance transfers to the CashRewards card are as low as 1.99% with their promotional offer. If you’ve already got other credit cards but are carrying balances with higher interest rates, transferring your balance to the CashRewards is a great option to help save money in the long run while you chip away at your debt. Plus, you could earn $150 bonus cash back during your first 90 days with the card.

Stay on top of payments. The best way to make sure your debt doesn’t snowball is to pay off the full balance each month. This will help grow your credit score and ensure you’re not paying interest fees. 

Keep old accounts open. Since the age of your accounts and your credit utilization are key components to your credit score, keeping open accounts that you no longer use, like lines of credit or retail cards you’ve already paid off, could be a smart plan. In many instances, keeping open inactive accounts will not detract from your credit score, but rather the opposite.

Track your credit score. Knowing your credit score each month is helpful not only to track its growth, but to also quickly identify any fraudulent activity, like someone opening a card or loan in your name. Many financial institutions, like Navy Federal, provide their members with complimentary access to their credit score and can help notify you of suspicious activity.

Managing your credit and growing it into a healthy range is important, especially while you’re young. Good, disciplined choices will help you along the path to financial health and open doors for more favorable lending. 

This article was made possible by Navy Federal Credit Union