If you're just starting out with building credit, or you need to re-establish your credit, it is important to know exactly how your credit score is calculated.
That way you can avoid the things that will hurt you, and passively work on things that will make you someone that a lender wants to do business with.
When you effectively build outstanding credit, you will many options to borrow money whenever you want and with the terms that you want.
When it comes to building wealth, there may be no greater advantage than having a relationship with lenders that are willing to throw any amount of money at you.
The most important factor that affects your credit score is your ability to repay your debts.
That means for the person who is establishing credit for the first time, they need to create a repayment history.
To do that, simply get two major credit cards and use it for your everyday purchases.
Just don't spend more than you normally would, and pay off your balance in full every month.
If you don't trust yourself, just use your card to make one minor purchase a month.
The amount you charge has nothing to do with your ability to pay off your debts, so you can literally charge a penny every month and pay it off, and you would be establishing good credit.
The second important thing to make sure you are doing in order to build or re-establish good credit is to keep your available credit to debt ratio low.
In other words, if you have a credit card with $10,000 limit and you have a $5,000 balance, you are using 50% of that available credit.
The closer you are to reaching your limit, the more it will hurt your credit rating.
Ideally you wan to be below 30% your limits.
The third thing you want to do is have different types of credit.
The FICO score looks at how well you manage debt, which means they want to see you use revolving debt (or credit cards) and installments loans (such as an auto loan or mortgage).
You can get creative with obtaining installment loans and repaying the loan back with the money that is lent to you if you don't already have an auto loan or mortgage.