Consolidated Credit Guide: How to Build Good Credit Step by Step

Learn how to overcome common challenges to achieve the score you want.

Good credit is essential for financial stability and your ability to achieve long-term goals.  You need a good score to purchase a home, buy a car and even sign up for basic services, like utilities. Of course, maintaining a high score isn’t always easy.

The information in this section is designed to help you build good credit without paying for expensive repair and monthly monitoring services. You will learn how to:

  • Review your reports each year
  • Correct mistakes and errors for free
  • Rebuild after a period of financial hardship

What is a credit report?

It’s a comprehensive profile of your life as a credit user. It shows:

  • What types of accounts you have
  • The status and payment history of those accounts
  • Other related public information, such as collections and court-ordered payments

Each bureau (there are three) maintains their own proprietary version of your report. So, you actually have three reports, instead of just one. However, they should all basically say the same thing.

Creditors use your report to judge your creditworthiness when you apply for a loan or new account. They essentially look at your report to see how likely you are to repay the new debt.

Learn how to read your report »

What is a credit score?

It’s a number that tells a lender how much of a risk you are as a borrower. Different agencies and bureaus have different scores that they use. However, FICO is the main score used in 90% of financing decisions. So, for instance, if you apply for a mortgage, they will generally look at your FICO score first. They look at your score in addition to reviewing your reports. These two tools basically help the lender decide if they will approve you for the loan.

There are five basic factors used to calculate your score. Each factor has a different “weight,” so they affect your score at different levels.

How to Get a Good Credit Score

In order to get and maintain the score you want, you must continually take four basic steps:

  1. Review your reports annually
  2. Dispute mistakes to keep your reports clean
  3. Take positive actions that build good credit
  4. Avoid negative actions that damage your score
New credit score changes could improve your credit rating

Step 1: Reviewing your reports annually

By law, every consumer is allowed one free copy of their credit report once every twelve months. You simply go to, answer a few security questions and you can download your reports directly from the bureaus. This is often confused for paid monitoring websites that offer free reports when you sign up for their service. However, the website listed about is really and truly free with no strings attached.

Once you have your reports, you want to look for:

  1. Negative items that may decrease your score
  2. Mistakes and errors that you need to correct
  3. Information you don’t recognize that could be a sign of identity theft

Step 2: Disputing mistakes to keep your reports clean

Correcting mistakes and errors that can appear in your report is a process known as credit repair. You dispute a mistake with the bureau that issued the report. If they can’t verify the information within 30 days, the item must be removed.

This is a legal, legitimate process that you can do yourself for free.

However, you can also pay a state-licensed attorney to dispute mistakes on your behalf. The problem with these services is that many times, they don’t have a state-licensed attorney on staff. That means they aren’t legally allowed to provide the service, so it could be a scam!

Learn how the repair process works and how to avoid getting scammed »

Step 3: Taking positive actions that build good credit

Once you correct any errors that could decrease your score, building good credit becomes a gradual process. You small, measured steps to improve your score. These include:

  • Making all payments on time to maintain a clean payment history
  • Keeping revolving debt minimized to avoid over-utilization
  • Opening accounts only when you need them
  • Maintaining all accounts in good standing

The amount of time it takes depends on where you start. If you’ve never used credit and are just starting out, it generally takes about 6-12 months to achieve a fair to good score. .

On the other hand, if you’ve had challenges with debt or faced financial hardships like bankruptcy or foreclosure, you must take steps to rebuild your score. This involves gradually building a positive history and offsetting any damage you already caused.

Learn how to rebuild if you have a bad score »

Step 4: Avoiding negative actions that damage your score

If you’re working to achieve a good score, then you don’t want to take any actions that set you back. One mistake is often enough to set you back significantly. Instead of one step forward, two steps back, it’s almost one step forward, ten steps back.

This makes it crucial that you actively work to prevent new damage. To do this, you must:

  • Avoid any late payments that are more than 30 days past due
  • Don’t run up credit cards to their limits
  • Never allow bills to slip into collections – especially medical bills!
  • Pay all court fines and court-ordered payments, such as child support
  • Don’t open too many new accounts within a six-month period
  • Don’t close old accounts, which affects the length of your payment history

Good Credit FAQ

What is a good score?

FICO scores range from 300-850. Any score above 700 is usually considered a good score and above 750 is excellent. If you have a score below 600, you may struggle to get loan approvals; you will also pay higher interest rates.

What’s the cost of bad credit?

A bad score increases the cost of borrowing. With good credit, your card APRs should be around 16%. However, with a bad score, those rates are likely to be more than 20%.

Your score also affects the rates you receive on loans, including your auto loan and mortgage. A higher rate of just a few points on such a large amount financed can be significant. You can use the calculator below to assess the cost of a low score. You can also see the savings from a high score.

How long does it take to build?

The time it takes to achieve the score you want depends on where you start and what score you want. In general, it takes at least 6 months to see any notable improvement in your score. You can generally go from fair to good in about a year if you take the right steps.  However, if you want to go from good to excellent, this takes a more concerted effort.

It’s worth noting that the “weight” of negative items decreases over time. A missed payment from 6 years ago has much less impact than one missed last month. This means that even with negative items like bankruptcy or foreclosure, you can take steps to rebuild even before the penalties expire.

Does my score affect my insurance premiums?

In the case of auto insurance, yes; depending on where you live, it can also affect homeowner’s insurance. Your score is one factor used to determine your policy and premiums. Insurers use something known as a credit-based insurance score in states that permit this type of scoring. It’s intended to help them assess the likely that you will make a claim.

This insurance score can only be used in some states. In addition, it can’t always be used for every type of insurance.

Learn how insurance scores work »

What is “subprime credit”?

Subprime is basically another name for bad credit . Most lenders consider a FICO of 500-600 to be subprime. Any score between 300-499 is considered deep subprime. In general, subprime consumers have a hard time qualifying for traditional loans and credit cards. A subprime borrower may have to rely on adjustable rate loans or alternative no-credit-check financing like payday loans. These types of financing are riskier and harder to manage.

This basically means that bad credit can become a vicious cycle. You can’t qualify for good loans with low fixed interest rates. So, you turn to alternative financing that often leads to more problems with debt, which drag down your score even more. Ideally, you want to find a way to fix your score before you borrow again.

What is a credit limit?

A limit is the maximum amount of financing extended to you on a revolving credit line, like a credit card. Revolving means you can borrow against an available line as needed. For instance, if you open a card with a good score, they may offer you a limit of $1,000.

You never want to run up an account to the limit. This is bad for your score.

What is credit utilization?

This is a ratio that measures how much credit you’re using versus the total amount you have available. If you have 5 cards that each have a $1,000 limit, then your total available limit is $5,000. If you have $500 balances on two of those cards, then your utilization ratio is 20%.

In general, lower utilization is always better. You should maintain your ratio at 30% or less to maintain a good score. There is no penalty for 0% net utilization; in other words, you can pay off purchases in-full every month and not damage your score.

If I just moved to the U.S., what’s my credit score?

Scores don’t carry over from different countries. So, even if you immigrated from another country that uses scoring, your score won’t come with you. Instead, you need to build in the new country from scratch.

And be careful! The rules for scoring from your home country can be significantly different! Take some time to familiarize yourself with the system here so you can avoid a bad score as you transition to life in your new home.

Learn more about establishing yourself in a new country »