Your guide to getting and keeping good credit

Credit can make or break you when it comes to life's biggest purchases. But what is it, exactly?

The term "credit" can be defined as a customer's ability to obtain goods or services before actually paying for them, with the understanding that payment will be made in the future.

Let's say you want to buy a house, which can cost hundreds of thousands of dollars — a sum most of us usually don't have stashed under the mattress or sitting in our bank account. But if you have a steady income stream and a history of paying off your debts, a lender may loan you the money, trusting you can pay it back.

If you follow through by making payments in full and on time, your credit will reflect that. If your payments are late, your credit will suffer.

If you've never used credit, then you don't have a credit reputation.

Ready to build your credit? Read on to learn about how to get credit, understand what it means and improve it.

Do I have good credit?

When lenders decide whether to give you a loan, they review your credit report to see your credit history and note any concerns.

They also review your credit score — a number typically ranging from 300 to 850 that quantifies your credit risk. Your credit score tells the lender how likely you are to pay them back based on your past behavior.

The number also helps a lender determine the terms of that loan and whether you'll have a high or low interest rate.

It's generally easier for you to get a loan for a house or car, rent an apartment or get an affordable insurance rate if your credit score is high. A good credit history can also help you avoid paying things like deposits for utilities.

Understand your credit report.

At least once a year, it's smart to check your credit report, so you can see the snapshot lenders are getting of your credit history. You can also monitor your credit report for accuracy.

On your report, you'll see financial information such as your bill payment history, any past loans you've received and your current debts. You can get a free copy of your credit report every 12 months from each credit reporting company. A good place to start is annualcreditreport.com (Opens in new window).^{See note1} It also includes any new applications you may have submitted, which show up as "credit inquiries."

There are three main credit reporting bureaus: Experian™, Equifax® and TransUnion®. Each bureau may have slightly different information depending on what and when information is reported by creditors.

5 factors that influence your credit score

Most lenders use what's called the FICO® score, but there are many different versions of it. And if that's not confusing enough, you'll have a FICO Experian score that may look different than your FICO TransUnion score.

It's complex, but if you understand the five main factors that go into a FICO score, you'll have greater insight into how your behavior can influence lenders' decisions.

As you read these factors, there is additional good news. These steps can improve your credit score even with other scores. For example, the VantageScore has different percentages than the FICO, but taking steps to improve FICO will also improve VantageScore (Opens in new window).^{See note1}

FICO score factors

1. On-time payments

This is the biggest factor, which accounts for 35% of your overall FICO score. One missed payment of 30-plus days, and you'll have a negative mark for up to seven years. So pay your bills on time.

Closing your account won't make this negative mark go away. No matter what any credit repair company might claim, if your payment was late, you can't expect it to be permanently removed unless you can prove it wasn't your fault. For example, if your credit card company reported a late payment but you actually paid it on time, they just made a mistake in accounting.

While a bad payment history doesn't just disappear overnight, the good news is that habitually paying on time moving forward will pay off in the long run. Positive payment history remains for 10 years from the last date of activity.

2. Current balances

How much you owe compared to the amount of your available credit is 30% of your FICO score.

For example, if you have a $5,000 credit limit and a balance of $4,500, it can really hurt your score.

Financial advisors sometimes recommend "rules of thumb" for your credit card balance versus your available credit. For example, some advise keeping your amounts owed below 30% of your available credit and others believe that keeping your outstanding credit balance less than 10% yields the best credit score.

Really, it comes down to all the factors in each category trending in the right direction at the same time. Chipping away at your balances can make a pretty big difference.

3. Credit history

The length of time you've had credit is the third-highest factor at 15% of your FICO score. The longer your good history of borrowing and repaying, the better. If you've had a short credit history, creditors can't tell as much about you as they can with someone who has a long history.

Be careful about closing credit accounts — especially older ones. While the history of that account doesn't immediately disappear, it will eventually, which can impact your average length of credit history.

What is immediately impacted is your amount of available credit.

Suppose you owe $10,000 in credit card debt and have $15,000 available equally across three credit cards. If you close one of those cards, your total credit utilization ratio goes from 66.67% to 100%.

4. Credit mix

Credit mix looks at what type of credit you have. That could be a retail card, a credit card or an installment loan, such as an auto loan or a mortgage. Having a mix of credit types shows lenders you know how to manage different types of credit.

Because this category is only 10% of your overall FICO score, FICO cautions against opening several new accounts at once just to improve your credit mix.

While improving your credit mix can help your score, opening several new accounts could actually lower your credit score — especially if you're newer to credit. That's because it lowers the average age of your accounts, which is a larger factor than your credit mix.

When deciding whether to close credit cards you no longer use, remember this credit mix category and consider using it to your advantage.

Having a balance reported to the bureaus on an older credit card shows continued activity.

And if you pay that balance on time every time and in full every time, you'll create a strong payment history moving forward without paying interest.

5. New credit

This category is 10% of your overall FICO score. Each time you apply for a new credit account, you receive a hard inquiry against your credit. Too many inquiries and new accounts in a short period can be a red flag for lenders. It signals you may be in danger of overextending yourself.

There are some exceptions for rate shopping when applying for a vehicle loan or a mortgage within a certain window of time.

When you check your free credit report once a year, you'll know what you owe and can look for any discrepancies. If anything is incorrect, you can dispute it with the credit reporting bureaus.

These self-inquiries are referred to as soft inquiries, and they don't impact your credit score.

What's not in your credit score

While it may feel like every bit of your life's history is wrapped up in your credit report, it's important to note what's not included in calculating your FICO credit score.

These factors include your age, income, employment information, location, interest rates, child and family support obligations (unless you're delinquent), race, color, religion, national origin, sex, marital status, "soft inquiries," any information not found in your credit report, any information not proven to be predictive of future credit performance, and whether you're participating in credit counseling of any kind.

This last point is especially important, as I've had members share that they did not seek credit counseling because they were afraid it would hurt their credit score.

How to establish credit

If you don't have a credit reputation, you might not qualify for a mortgage or high-priced automobile. A highly sought-after rewards credit card may not be an option, either.

But don't be discouraged. There are other options to help you establish your credit reputation.

Consider the following possibilities:

• Ask a family member to add you as an authorized user to their account. As an authorized user, you'll "inherit” the account owner's history on the card. That means if your family member has good credit, it could give you a boost. Keep in mind that you aren't an owner on the card, so your access may be limited — and the card owner can remove you at any point.
• Open a secured credit card. With a secured card, you place a deposit — usually held in a CD or other form of deposit account — which is used as collateral and establishes your credit limit. For example, you deposit $500, which gives you a $500 credit limit. Each month you make your payments, which are reported to the credit bureaus.
• Consider, with caution, a retail store card or gas card. While these cards are often easier to get approved, interest rates tend to be high. Your best bet is to limit your spending and pay off the balance in full each billing period. Avoid opening several new credit cards you don't need just to get a special offer or discount. This approach could backfire and lower your credit score.
• Repay student loans on time. Most federal student loan options don't require an initial credit check, but once you begin repayment, the activity is reported to the credit bureaus.
• Apply for the loan with a co-signer. Creditors are often willing to approve a loan if somebody creditworthy signs on the loan with you. But take caution with this option, as well. If you fail to pay, you could ruin a friendship or hurt a family relationship, as the co-signer is just as liable — and can even be sued for repayment. Even if you pay on time, the debt payment is often included in the co-signer's debt-to-income, or DTI, ratio. While DTI isn't part of your credit score, it's a factor in credit approvals and could hurt the co-signer's chances of being approved for a loan of their own. We don't recommend this approach for the reasons mentioned, but it's an option.

If you applied for credit but were denied because of past mistakes, read our article, Denied credit? Here's what you can do about it.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.