Building credit and keeping yours healthy

Your credit score is a big part of your financial identity. It can be the most important factor in determining whether you can get a loan and how much it'll cost you.

[Visual of meter reading “FICO SCORE” “LOW” is on the left, and “HIGH” on the right. “Higher rates” and “Lower rates” are written and erased as the voiceover progresses.]

Your credit score is a number, the most common being known as a FICO score, that helps evaluate how much of a risk it is to lend you money. It simply shows how responsible, or irresponsible, you are with your finances. When it’s good, it can help you get access to lower rates, which enables you to borrow for both short-term emergencies and longer-term bigger-ticket items.

That’s why falling behind on your mortgage payments, car loans, or credit card bills is not a wise move. In fact, it may damage your future ability to borrow money. So while you may still be able to get the things you need, like a home mortgage or a car loan, it could cost you even more in the long run. And that’s because you’ll likely be charged a higher interest rate.

Now, bad credit can affect you in areas of your life you wouldn’t even expect.

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Take employers and landlords, for example. They may look at your credit score to see if you’d be a responsible employee or tenant.

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Some car insurance companies may also see a direct relationship between your credit score and the likelihood of you being in an accident. And in certain states, this even means you’re charged a lot more for insurance.

So how do you build a good credit score or protect what you’ve already built? In general, there are five things you should know about how a score is calculated using information on your credit report, some that weigh a little more heavily than others.

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First and foremost is your payment history. That goes for all of your bills on your credit report—not just your credit cards. This one’s a biggie because it makes up a decent portion of your overall score. Creditors want to know that you pay on time, every time, even if it’s just the minimum. And consistency goes a long way, so pay your bills when they’re due and never skip payments.

[Visual of “DEBT” being poured into “CREDIT” in the form of coffee pot and coffee mug. Coffee spills over.]

The second most important factor is how much you owe. It’s a good rule of thumb to keep your total debt lower than the overall credit available to you. The lower the better. Because if you get too close to your limit, creditors may think you’re biting off more than you can chew or that you are supplementing your income with credit. So whenever possible, keep this debt-to-credit ratio as low as possible.

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Third, creditors want to see that you’ve been managing credit for a long time. Your credit history shows how long you have been using credit, how you’ve handled that responsibility, and how responsible you’ve been. Establishing a good long history means you’re an old pro at borrowing or managing money and are likely to repay what you borrow.

[Visual of man juggling pineapple, bowling ball, and flaming torch with “MORTGAGE,” “CREDIT CARDS,” and “CAR” above the three items]

Next, your score may also be affected by the mix of credit types you have. A good mix will span different types of credit—from a mortgage to credit cards to installment loans like car payments, which are repaid over time—and can help you improve your overall score. This is because it proves you have experience handling a variety of account types instead of having a lot of accounts in just one area. And when it comes to balances, lower is always better for your score.

[Visual of magnifying glass over sheet of paper reading “NEW ACCOUNTS”]

Lastly, creditors want to know what you’ve been up to lately. They’ll look at recently opened accounts and where you’re inquiring about credit. Even if you’re relatively new to credit or were just thinking about borrowing, they want to see who gave you credit and when.

[Visual of man on wire above building balancing bags of money. Then, a visual of a cash register with signs to left and right reading “LIMITED TIME OFFER!.” “SIGN UP AND SAVE!” and “SAVE NOW!”]

Also, applying for too much credit can be seen as high risk because it looks like you’re desperate for loans. Take department stores for instance. Doesn’t it seem like they’re always offering you 20% off if you open up a credit card? Although it could save you some cash right there at the register, think about the possible long-term consequences of opening, and paying for, yet another account.

[Visual of elves holding and carrying signs reading “EXPERIAN,” “EQUIFAX” and “TRANSUNION”. Then, a screen with elves holding signs: “CREDIT REPORT,” “FOR FREE,” “CREDIT SCORE,” “FOR A FEE,” and “ANNUALCREDITREPORT.COM”]

So, now that you know what makes up your credit score, it’s important to check your credit reports because that’s how your credit score is established in the first place. There are three national credit-reporting bureaus that you should know: Experian, TransUnion and Equifax. And you’re entitled to a free credit report from each of them every year, which you can request from AnnualCreditReport.com. But you should know that only the reports themselves are free and that there is a fee to get your actual credit score.

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Also, be sure you check your reports for accuracy and take care of any problems ASAP. You don’t want any skeletons in your credit closet…

[Visual of radio dial being turned. It reads “Credit Score Healthy”]

[Visual of man with boxes stacked too high. Top box reads “CREDIT SCORE.” Cuts to box smashed on the floor behind man.]

In the end, the best thing you can do to keep your credit score healthy is to pay your mortgage, installment loan, and credit card bills on time. Also, be careful not to exceed account limits and make sure none of your accounts are delinquent. Getting an account turned over to a collection agency can really hurt your credit score.

[Visual of smiling woman hitting a strength tester game reading “CREDIT RATING” above numbers, with puck hitting the “800” score on the game]

If you take these steps, you can achieve a higher, healthier credit score. And that’s something that money just can’t buy.


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The material provided on this video is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. © 2016 Bank of America Corporation. FICO is a registered trademark of Fair Isaac Corporation.