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Credit Education

Simple steps to build your credit.

Building good credit is like building a house. You start with a foundation – which, in this case, is your current credit score – and build from there. It’s all about how you spend the money you earn and how much debt you incur.

Open and start using a credit card to build favorable credit history
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Use only 30% or less of your available credit
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Pay bills on time
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Only apply for credit as needed
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Report less-traditional payment data
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Graphic with five icons that represent steps for helping to build and manage credit

Why credit is important

The way your credit is gauged is through your credit score. The better your credit score, the more likely a creditor is to trust that you will pay them back. A strong credit history can help you towards your goal of homeownership.

How credit is reported

There are three primary national credit bureaus that monitor and report on your credit — Equifax, Experian, and TransUnion. Your credit score is one important factor towards becoming approved for a mortgage.

How credit impacts your ability to buy a home

Your credit score can affect where you qualify for a loan, as well as the type of loan and loan terms. You may still be approved for a mortgage with a lower credit score, but you may have to pay a higher interest rate.

Building your credit 

As you set your foundation for building good credit, know it may take time, but it’s never too late to start. Set small, achievable goals and give yourself a big pat on the back each time you accomplish one. Here are some resources to get you started.

Understanding my score

Your credit score is a number between 300 and 850 assigned to your credit based on feedback provided by creditors to any of three credit reporting bureaus. Your credit score rates your ability to pay depending on where it falls within the credit score range. A higher score can help you unlock savings and benefits through better interest rates and more favorable loan terms.

Finding my score

The three primary credit reporting bureaus – Equifax, Experian, and TransUnion – issue a credit report that reflects your financial history. Your report includes items such as:

  • Your payment history
  • Amount owed to creditors
  • Available credit
  • Types of accounts
  • How long the accounts have been open

You can request these reports from each of the three primary credit reporting bureaus every 12 months for no charge as a way to track your score.

Pro tip: Stagger when you check your credit report from each agency to monitor your credit throughout the year. Your score may vary depending on the credit scoring model used by each bureau.

Build a credit history

You can start building your credit by opening and using credit cards in moderation. If you don’t have a credit card, try applying for one from a department store or applying for a secured card from a bank—one that typically requires a cash security deposit. Keep in mind that these options usually have a lower balance limit and a higher interest rate, so you’ll want to use them in moderation and pay your bills on time. Showing consistent on-time payments will help you establish your credit history and strengthen your score.

By building and using credit responsibly, you’re helping establish a credit history that can be used to help you achieve your financial goals.

On-time payments matter

When you apply for credit such as a car loan, renting an apartment or house, or even a mortgage, the creditor will check your credit history. If you have consistently made your credit payments on time, the creditor will take that into account when evaluating you for a loan. This can make a difference in whether you are approved for the loan.

Credit usage

The amount of credit you use versus how much credit you have available is your credit utilization, a factor that impacts your credit score. Taking your total balance across all credit cards and dividing it by your total available card limits is your credit utilization ratio. You want to keep this ratio at less than 30% to build and keep a strong credit score.

Debt-to-income ratio

Debt-to-income (DTI) ratio is the amount you owe on all outstanding debts compared to your income before taxes and is shown as a percentage. A low percentage helps increase your access to new loans. Paying off existing debts and not incurring new debts help to lower this number. While your DTI may not impact your credit score, it is a key indicator lenders use to understand whether you can afford a mortgage payment.

Explore our credit videos 

Watch our videos to learn more about building your credit.

To learn more about credit and homeownership, check out HomeView, our free course for first-time homebuyers.

Managing your credit 

As you learn about your credit score and how it affects your ability to borrow, you may want to start planning for future purchases like a home. Create a plan to help you maintain your credit and take it step-by-step.

Budgeting within your means

To help you build and maintain good credit, you should start by setting up a budget. Determine how much you make and how much you currently spend. Track your spending using a budget tracker so you can see where you may be able to cut back. Try to avoid unnecessary spending if you are able and focus on paying off debts. It may not happen overnight, so set smaller goals and take it one step at a time as you try to work toward your larger goals – like owning a home.

Managing your debt

To help manage your debt, you first need to know exactly how much you owe. Set up a plan to pay off existing debts and try to avoid incurring new ones. There are several free online resources for setting up a workable payoff plan to help you succeed, such as the reducing debt worksheet from CFPB. Pay off high-interest debts first and, if you need to, use cash to pay for purchases as you work down your debt.

Pro tip: Try your best not to make large purchases or open a new credit card within six months before trying to buy a home, as that could impact your DTI ratio or credit score.

Improving your score

Increasing your score also improves your chances of getting a mortgage or getting better loan terms. There are several ways to improve your score.

  • Maintain a low balance on your credit cards when possible – try not to “max out” your cards, and do keep your credit utilization ratio at less than 30%.
  • Pay your bills on time and maintain that credit history. Your score builds over time and by paying your bills and using your credit cards in moderation, you’ll build up your credit history.
  • Keep the number of credit cards you have to a minimum. Be prudent when applying for or accepting credit card offers.
  • Try not to cancel or close your credit cards as that could impact the total amount of credit you have available and how much you have used. This means it can increase your credit utilization ratio and lower your score. Not using your credit cards for an extensive period of time could also lead to the account being closed and could impact the length of your credit history. Try to maintain minimum usage and pay the balance off on time. With a revolving account, such as a credit card, you don’t have to carry the balance to keep the card open.

Rebuilding your credit

If you have experienced a financial setback and your credit has been impacted, don’t be too hard on yourself. It is possible to rebuild your credit, but it will take time. Generally, recent negative information impacts your credit score more than older items, so start rebuilding your credit today with consistent, positive actions. Follow the steps in the above “Improving your score” section, and that way, when you’re ready to buy a home, your credit will be ready, too.

You can work with a credit counselor to help you navigate your financial journey.

Pro tip: There are no shortcuts to rebuilding credit, and no company can “magically” fix your credit, no matter how convincing they may sound. Check out some tips from CFPB on how to spot and avoid a credit repair scam.

Check your score

By law, you can receive a free credit report from each of the three primary credit reporting bureaus every 12 months without impacting your credit score. Take advantage of this to keep an eye on your credit.

Dispute any errors

If you see anything that is not correct on a report, take the necessary steps to dispute errors. If you have recently paid off past-due obligations that haven’t been updated on your credit report, contact the reporting bureau to make the update.

Calculate and manage your DTI

Your debt-to-income (DTI) ratio, along with your credit score and credit history, will be an important factor in getting approved for a loan. You can calculate your DTI ratio by adding up your total monthly recurring debt payments and then dividing that sum by your gross monthly income, which is the total monthly income before taxes are deducted. Your monthly debt payments may include your rent, any student loan or car loan payments, alimony and child support payments, minimum credit card payments, and any other recurring debt payments. The specific requirement for your DTI ratio may depend on the type of loan you are applying for, but you’ll want to keep this ratio as low as possible.

Pro tip: Keep in mind that it is also prudent to consider other expenses, such as childcare payments, groceries, utility bills, other monthly living expenses, and even taxes that do not appear on your credit report. While these are not included in your DTI ratio, they can help provide a holistic view of how much you can afford when budgeting your monthly income.

Credit FAQs

There is no one definition of a “good” credit score. Your credit score might be sufficient for one lender but not another. A good credit score is the one that puts you in a position to get the credit you need. Once you achieve a good credit score, you will need to maintain it by continuing to manage your credit. Pay your bills on time, open only credit card accounts that you need, and keep your balances low.

It is possible to get a loan or credit card even if your credit score is low. However, you may be charged a higher interest rate or have a lower credit limit. You may also need to link the credit card to a savings account or provide a deposit. Avoid credit cards or loans with extremely high interest rates as it is particularly hard to pay the balance down.

Your credit score is only affected when a lender checks your credit score because you have applied for a loan or credit card. This is called a “hard inquiry.” “Soft inquiries” are when your credit score is checked by you or as part of a background check or when a financial institution offers you a pre-approved credit card or loan, which does not impact your credit score. Hard inquiries stay on your credit report for two years.

Credit scores can change daily as additional information is reflected on your credit report. Your credit score can be affected by changes to your account balance due to payments you have made or new charges. New hard credit inquiries can also cause your score to change. By closely monitoring your credit score, you can see when it changes. If your score decreases because of new credit charges you’ve made, you may be able to increase it again by making a payment.

Your consistent, on-time rent payments can be taken into consideration to help determine if you qualify for a home loan. Learn more about how you can make your rent count.

You can dispute any incorrect or inaccurate information with the credit reporting bureau that issued the credit report. It’s a good idea to request a free report from each reporting bureau every 12 months and check it carefully, as the information may be incorrect or outdated. Stagger your report checks so you can track your score throughout the year. Careful monitoring is the key to keeping your credit reports up-to-date and accurate.

Most delinquencies will be removed from your credit reports after seven years, with the exception of bankruptcy which may remain on your reports for ten years. When rebuilding credit after having bad debts, it’s very important to monitor your credit reports and, if the bad debts aren’t removed, file a dispute with the reporting bureaus. If you can, pay your bills on-time, as a consistent, long history of on-time payments can help you recover ahead of the seven years.

It is better for your payment history if you make small purchases on a regular basis on all cards. Then pay the balance off each time. If you keep the balances at zero without making purchases, you are not adding to your payment history.

Discover HomeView by Fannie Mae

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Take a look at HomeView, a free educational course provided by Fannie Mae.

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