Do's and Don'ts for Building a Solid Credit History

How to start, what to avoid and tips for making the most of your financial decisions.

How to start, what to avoid and tips for making the most of your financial decisions

Paying your bills on time, every time is a great way to help your credit, but it's also important to make sure the balance you are working to pay off doesn't get too high. "Keep the balance at 50 percent or less of your total credit limit for the card," says Trey Loughran, president of Equifax Personal Solutions, a division of the Equifax credit bureau. "But if possible, it's best to pay off the total balance each month, or pay more than the minimum monthly payment required."

FICO scores reflect more positively on someone using less of his or her available credit because "if someone is using most of their available credit, that can be an indicator of someone that potentially could have trouble repaying their debt," Sprauve says.

Having credit makes it easier to get more credit, but having lots of credit isn't always ideal. "It's a red flag in the FICO algorithm if someone opens a lot of credit at the same time," Sprauve says. "There is a myth out there that 'the more credit I apply for and the more credit I have, the better that is for me,' but it's not true. What can happen is you can look like a bigger risk if you open a lot of credit at once."

While FICO scores are factored into 90 percent of credit decisions in the United States, scores are not the only thing lenders take into account, Sprauve says. Keep up with your personal bills to put yourself in the best light for potential lenders. "Things like rental and utility payments are not consistently reported to the credit bureaus, so the FICO score doesn't take those things into account," Sprauve says. "But when applying for a line of credit, each lender will look at different things, and they may take those things into account."

Looking forward

After some time with your first line of credit, you can consider getting additional credit based on your needs. There's no difference between the type of credit and its impact on your FICO score, but experts say it helps your score over time to have a variety of credit. "The very best credit reports have a mix of credit, so that means it's good to have revolving credit, plus an installment loan, like a car or boat loan," Sweet says.

If you miss a payment or two, the best way to rebuild your credit is to pick right back up with the monthly payments. Additionally, the longer ago something happened, the less impact it has on your score. "The point there is that we have all made mistakes," Sprauve says. "As soon as your start those good habits and maintain those good habits going forward, any bad habits or mistakes in the past become less critical."

[See 50 Ways to Improve Your Finances in 2013.]

Lastly, once you have a credit-building regime in place, don't forget to check both your credit report and FICO score at least once a year. "Some people believe this type of inquiry can have a negative impact on your credit score, but this is not true," Loughran says. "We actually encourage monitoring of your credit regularly so you clearly understand where your credit stands and also detect any potential signs of identity theft."