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How to build credit and achieve a good credit score

CNBC Select reviews credit score basics and credit building tips that can help you improve your credit score over time.

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Achieving a good credit score is essential if you care about your overall financial health. When you have good credit, you increase your qualification odds for credit cards and receive some of the best interest rates on various credit products.

But building good credit doesn't happen overnight. Instead, you need to consistently practice responsible credit behavior, such as paying bills on time and limiting debt.

"Building a credit history takes time, so it's a good idea to start early so credit is there to work for you when you need it," Rod Griffin, director of public education for Experian, tells CNBC Select.

Below, CNBC Select reviews credit score basics and credit building tips that can help improve your credit score over time.

How to build credit

  • Understand what is a credit score
  • Learn how credit scores are calculated
  • Pay bills on time and in full
  • Maintain a low utilization rate
  • Limit new credit applications
  • Alternative ways to build credit

What is a credit score?

Your credit score is three-digit number, ranging from 300 to 850, that is the result of an analysis of your credit file. Lenders use your credit score to judge your potential credit risk and ability to repay loans. Credit score ranges vary based on the model used (FICO versus VantageScore) and the credit bureau (Experian, Equifax and TransUnion) that pulls the score. FICO scores are used in 90% of lending decisions, so those ranges are listed below, using estimates from Experian.

  • Very poor: 300 to 579
  • Fair: 580 to 669
  • Good: 670 to 739
  • Very good: 740 to 799
  • Excellent: 800 to 850

Take action: Check your credit score for free now

How are credit scores calculated?

Credit scores are calculated by looking at five key factors. Here are the key factors FICO considers.

  1. Payment history (35%): Whether you've paid past credit accounts on time
  2. Amounts owed (30%): The total amount of credit and loans you're using compared to your total credit limit, also known as your utilization rate
  3. Length of credit history (15%): The length of time you've had credit
  4. New credit (10%): How often you apply for and open new accounts
  5. Credit mix (10%): The variety of credit products you have, including credit cards, installment loans, finance company accounts, mortgage loans and so on

Pay bills on time and in full

"Making payments on time and keeping your balances low are the two most important factors when it comes to building credit," Griffin says.

In fact, payment history is the most important factor making up your credit score. Your credit score considers whether you make payments on time or late and if you carry a balance month to month or pay it off in full.

It's a good idea to pay off your bill in full each month to avoid potential late payment fees, penalty APRs and interest charges that often result from carrying a balance. (Learn when a credit card payment is considered late.)

"Before you open a credit account, you should know why you're opening the account, what you will use it for and how you will pay the balance off," Griffin says.

As a rule of thumb, set up autopay for at least the minimum payment, so you can avoid unnecessary mishaps. You can also schedule email, text or push notifications through your card issuer.

Maintain a low utilization rate

"If your balances increase over time, your credit scores will suffer. Your utilization rate, or balance-to-limit ratio, is the second most important factor in scores, behind your payment history," Griffin explains.

To calculate your utilization rate, add up the total balances on all your credit cards and divide by the total of your credit limit across all cards.

Let's say you have two credit cards:

  • Card A: $1,000 balance and $3,000 credit limit
  • Card B: $3,000 balance and $5,000 credit limit

Your total balance would be $4,000 and total credit limit $8,000. That makes your utilization 50%, which is high. You should aim for a low utilization rate around 30% to improve your credit score.

"It's important for consumers to remember, the lower your utilization rate, the better," Griffin says. "While any balance can cause scores to decrease, utilization greater than 30% can cause scores to decrease more rapidly because of a much greater chance of default."

If you find it hard to keep track of the percentage of credit you use, take advantage of various alerts card issuers set, such as when your balance exceeds a certain amount or when you're approaching your credit limit. If you have no problem paying your balance in full each month, you can also call your card issuer and ask them to increase your credit limit.

Limit new credit applications

"More isn't always better when it comes to building credit," Griffin warns. "Opening too many accounts at one time can make you look like a greater risk to a lender and have a negative impact on your credit scores."

Each time you apply for credit, an inquiry appears on your credit report, regardless if you're approved or denied. This can temporarily lower your credit score by roughly five points, though it will bounce back in a few months. While one credit inquiry isn't likely to hurt your score, the effect can add up if you apply for multiple cards within a short period of time.

If you want to open more credit cards, consider doing it over time instead of within the same month. While there's no number of credit cards that's too many, it's not wise to apply for several cards at once. It's a good idea to space them out — I opened 10 credit cards over a span of five years.

Alternative ways to build credit

"Remember, credit cards aren't the only option for building credit. If you have a personal loan, student loan, auto loan or mortgage, you'll want to make sure you are managing these responsibly as well," Griffin explains.

Here are some alternative ways to build credit.

Apply for a secured card

If you struggle to get approved for a credit card, there are alternative options. You can consider secured cards, which are built for people looking to build or rebuild credit. A secured card is nearly identical to an unsecured card, but you're required to make a security deposit (often $200) in order to receive a line of credit. The amount you deposit usually becomes your credit limit.

With a secured card, such as the Discover it® Secured Credit Card, you can build credit when using the card, then graduate to an unsecured card after responsible account management. Starting at eight months from account opening, Discover will automatically review your credit card account to see if they can transition you to an unsecured line of credit and return your deposit. This takes the guesswork out of wondering when you'll qualify for an unsecured credit card.

Become an authorized user

Another option is to ask a family member or close friend to add you as an authorized user on their credit card account. This is a relatively low-risk way to build credit since you're not responsible for bill payments and can simply piggyback off of someone else's credit. Before you're added as an authorized user, make sure the account owner has good credit.

Get credit for paying eligible bills

If you want to avoid credit cards altogether, you're not out of options. You can get credit for paying monthly utility, cell phone and streaming service bills on time with Experian Boost™, which is free to use.

"Two out of three people see instant increases to their credit scores with an average increase of more than 10 points," Griffin says. "As you develop good credit habits overtime, you'll be rewarded as your credit score responds positively."

For rates and fees of the Discover it® Secured Credit Card, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.