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How To Build, Rebuild And Protect Your Credit Scores

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This article is more than 2 years old.

<ere’s what you know to start a credit history, bounce back from a credit disaster and keep high scores from getting dinged.

  1. You have to have, and use, credit accounts. There are "alternative" ways to build credit, but those ways don’t generally help with mainstream lenders. Credit builder loans offered by credit unions can be a great way to boost scores and create an emergency fund at the same time. The money you borrow is placed in a savings account for you to claim after you’ve made the last payment. Secured credit cards are another way to build credit. You make a cash deposit of $500 to $2,000 with the issuing bank and get a credit line in the same amount. After 12 to 18 months, your scores are typically high enough to get a regular credit card.
  2. Don’t pay late! One skipped payment can knock more than 100 points off good credit scores and the effect can last up to three years. Put credit accounts on automatic payment so that at least the minimum is covered each month.
  3. Don’t let disputes or medical bills turn into collections. It may be better to pay the bill and take the biller to small claims court than risk your credit scores.
  4. Don’t carry credit card balances. Lenders increasingly see people who carry balances as being riskier than those who pay in full every month. Carrying balances doesn’t help your credit and may hurt it, plus you’re paying unnecessary interest.
  5. Keep credit utilization low. Don’t use more than 30 percent of your credit limit at any time; the less you use, the better. So 30 percent or less is good, 20 percent or less is better, 10 percent or less is best.
  6. Don’t close accounts if you’re trying to improve your credit. Shutting down cards reduces the gap between your available credit and the amount you’re using. That’s typically bad for your scores. Once your scores are high (750 and above), you can shut down unneeded accounts but not all at once. Ideally you would keep open at least two accounts.
  7. Don’t believe the myth that you have “too many accounts.” The problem with having several credit cards is that you have to monitor them all and make sure they’re being paid on time. They are NOT hurting your scores and they’re probably helping.
  8. Check your credit reports at least once a year. Errors on reports can affect your scores. The site to get your federally-mandated free reports isAnnualCreditReport.com
  9. You have a right to free credit reports, not free credit scores. Credit scores are three-digit numbers calculated from your credit reports. Free scores are available on many sites, including NerdWallet, and may be available from your bank or credit card issuers, as well.
  10. There’s not just one credit score. There are hundreds of credit scoring formulas and the scores change all the time. FICO is the leading credit scoring company but its scores come in many versions and generations. VantageScore is FICO’s main rival and provides the free scores for many sites. Any score can give you a general idea of where you stand but don’t expect that it will be the same one your lender sees. If you’re in the market for a major loan, you can buy your FICO scores for various industries at MyFico.com for $20 per bureau

Liz Weston is a columnist at NerdWallet, certified financial planner and author of five books, including the best-selling "Your Credit Score." She joined us on our show, "The Health Of Our Credit Scores."

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