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24 things you need to know to build good credit


Is a new home purchase in your near future? What about a new car? If you plan on making these purchases, taking out a loan, applying for a new credit card or doing anything that requires someone to review your credit score, you'll want to make sure that your score is as high as it can be.

To do this, there are a number of credit-building strategies you can use. But first, educate yourself on credit scores and how they can help you climb the ladder of financial success. Read on to learn everything you need to know about credit if you're looking to boost your credit score.

1. A typical credit score ranges from 300 to 850.

Your credit score is calculated using information in your credit reports, such as credit limits, loan amounts and payment history. The higher your credit score, the better shape you're in to qualify for a loan from a lender.

2. Good credit can save you money.

When you have a good credit score, which starts at around 720 to 750, you might be offered lower interest rates for mortgage loans, car loans and credit cards — which translates to more money you can keep in your pocket. Lenders also use the scores to disqualify consumers for the best, most competitive terms and rates.

3. FICO is the most commonly used score.

There are different credit scoring models out there, such as the VantageScore, but the FICO Score is considered the most popular. According to Experian, one of the three national credit bureaus in the U.S., the FICO Score is used in about 90 percent of credit decisions. You might have a slightly different FICO score from each of the three credit bureaus based on the different information in each credit report.

4. 'FAKO' scores are just non-FICO credit scores.

A "FAKO" score is a term used to describe other non-FICO credit scores such as the VantageScore, which was developed by the three credit bureaus — Experian, Equifax and TransUnion.

5. Credit scores can vary and change.

Different types of scores might vary from one another, and scores can increase or decrease over time based on the information in your credit reports.

If you're comparing credit scores across the three bureaus, MyFICO.com recommends you should access your scores at the same time. "Comparing a score pulled on bureau 'A' from last week to a score pulled on bureau 'B' today can be problematic as the week-old score may already be dated," states the site.

6. You can get your credit report for free — but you might have to pay to see your score.

Thanks to the Fair Credit Reporting Act (FCRA), you're entitled to one free copy of your credit report from each of the three credit bureaus every year. You can order your free credit reports by visiting AnnualCreditReport.com.

Your free annual credit report does not include your credit scores, however. Instead, you can buy your credit score directly from the credit bureaus, advises the Consumer Financial Protection Bureau (CFPB). Also, your credit card company might share your credit score with you, or you can turn to a third party that offers free credit scores.

7. You might not know which credit score version lenders use.

A vast majority of lenders use the FICO scoring model, but there are actually multiple versions within the FICO model. As CNBC reports, FICO's latest version arrived in 2014 and is called FICO 8. However, many mortgage lenders haven't updated to this version and are using older versions. So, it's advised that you ask your lender which version they're using so you can take the necessary steps to increase that particular credit score.

8. FICO Score products also include industry-specific versions.

You have your three basic FICO scores from each of the credit bureaus, but your scores might vary depending on whether you're applying for a mortgage loan, auto loan or credit card. One credit management expert told CNBC, "To be truly savvy, you must know the score for the type of loan you are applying for."

Although it might cost you extra, it might pay to review your industry-specific scores before applying for a loan. For example, many auto lenders use your FICO Auto Score rather than your basic FICO Score when determining credit risk, reports CNBC.

9. Negative items stay on credit reports for a long time.

Some negative items, including late payments, collections and foreclosures, can remain on your credit report up to seven years, according to MyFICO.com. A Chapter 13 bankruptcy remains on your credit history for seven years as well, but a Chapter 7 stays on there for 10 years. Unpaid tax liens can stay on your credit report indefinitely.

10. You can (and should) dispute errors on your credit report.

If you believe some of the information in your credit report is inaccurate, you should dispute it. The Federal Trade Commission recommends writing a letter to the credit reporting company and the information provider addressing the information that is inaccurate. The FTC offers sample dispute letters and more tips to help you get started.

11. Tax liens can be withdrawn from credit reports.

A federal tax lien is basically the government's legal claim to your property if you fail to pay a tax debt. If a tax lien is on your credit report, it can prevent or limit you from getting credit.

Fortunately, the IRS allows you to have a tax lien withdrawn if you pay it in full or enter a direct debit installment agreement. The latter allows you to pay the lien in direct debits, but you have to meet some requirements first. For example, you must owe $25,000 or less, and you must pay the tax lien in full within 60 months.

12. A low credit utilization ratio can help repair your score.

Another way to boost your credit score is to keep your credit utilization ratio low. That means you should focus on keeping the amount of your available credit relatively high. For example, if you owe $1,000 on your credit card that has a $10,000 credit limit, your ratio is pretty low at only 10 percent. But if you owe $5,000 on that credit card, your ratio jumps to 50 percent, which can damage your credit score.

Because the amount owed on your credit accounts determines 30 percent of your FICO score, credit utilization is extremely important. Aim for a credit utilization ratio of 20 percent to 10 percent.

13. Charging credit cards with balances doesn't help your score.

Stop using credit cards that carry an existing balance if you want to boost your credit score. This will only further increase your credit utilization ratio, which is something that you don't want.

14. Emergency funds can prevent credit card usage.

An emergency fund in a separate bank account can prevent you from using your credit cards when an emergency strikes. That way, you won't have to risk using more of your credit and increasing your credit utilization ratio.

15. Paying bills on time can boost your score.

One of the quickest ways to improve your credit score is to consistently pay all of your bills on time. Your payment history alone accounts for 35 percent of your total FICO score.

16. Paying off balances early results in a good payment history.

If you don't carry balances, using your credit cards periodically for purchases you can afford to pay off before the payment is due can help establish a good payment history without accruing any interest charges.

17. Technology can help you pay your bills on time.

A budget and a calendar, as well as text or smartphone alerts, can help you pay bills on time and avoid unnecessary late fees and bank fees.

18. Naming your teen as an authorized user can help build their score.

Want to help your teen build their credit score? Making her (or him) an authorized user on a parent account that you can control is a good way to help them build a positive credit history. Just remember: If you have a bad credit history, it could reflect poorly on your teen. And if your teen owes money on the credit card, that means you owe money too.

19. Hard inquiries can impact your score.

Several or frequent "hard inquiries" can decrease your credit score if it looks like your lifestyle is credit-dependent. However, checking your credit scores and credit reports does not result in a hard inquiry.

20. Student loan debt can hurt credit scores.

Just like with any debt, having too much student loan debt isn't good for your finances. And making late payments on your student loans can hurt your credit score, as well.

If it's too hard to manage all of your student loans, you should consider consolidating them. Equifax warns that because consolidating your student loans triggers a hard inquiry, your credit score could take a small hit. But, if consolidating helps you make on-time payments, that long-term benefit could be a higher score.

21. Co-signing loans can also hurt your credit.

You should think twice, maybe even three times, before co-signing loans of any kind — including student loans or car loans — for your kids or grandchildren. If they miss a late payment or default on the loan, your credit could be at risk.

22. You should always be on the lookout for identity theft.

Identity fraud and theft can ruin your credit score quickly. Signs of identity fraud include accounts you didn't open, purchases you didn't make and services you didn't order, which might appear on your credit report and affect your scores negatively. Check your credit report frequently to keep an eye on any unusual activity.

23. Keeping unused credit cards can pay off.

Keeping paid off or unused credit cards can help boost your credit score because you are keeping that unused credit. According to MyFICO.com, "By closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit utilization ratio."

24. Credit repair companies can do the work for you.

While you can repair your credit and boost your score yourself, a reputable credit repair company has expertise in dealing with the credit bureaus and can more efficiently identify derogatory items on your credit reports that can be changed. They can challenge those items and confirm they have been removed to boost your credit score faster.

From GoBankingRates.com: 24 things you need to know to build credit