Your Guide to Building Credit by Using Credit Cards Responsibly

Rebecca from Brooklyn says, “I really do enjoy the Money Girl podcast and listen as much as I can. As a 24-year-old, I'm new at my job and at managing money and I think it can be scary. But your podcast has helped ease my confusion and anxiety. My question is about the good, the bad, and the ugly of using credit cards. How do credit cards help you build credit and what are some healthy ways to manage cards and credit?”

Thanks for your question, Rebecca. I'll answer it by starting with an overview of how the credit scoring system works, to make sure you understand the rules of the credit game. Then I’ll explain how to use this information to build and maintain excellent credit for life.

How Do You Build Credit?

Many people have no idea how the credit system works. They may not care until they need a credit card or want to finance a big purchase, such as a car or home, and get denied.

Unfortunately, most of us are never taught about credit in high school or college. So, it’s no wonder that many people struggle to improve their credit. If you don’t understand all the components that factor into your scores, your credit rights, and various ways to build credit, you’re at a serious disadvantage.

Here’s an overview: Information about you gets reported to one or more credit bureaus that maintain the data in your file, known as your credit report. Then companies who want to access your credit report pay the bureaus for your information.

Credit bureaus don’t make lending decisions; they maintain your data. But credit reports can be huge, so companies want a quick way to evaluate you. That’s why credit scores were designed--they’re a snapshot of your current credit situation.

Also Read: How to Build Credit With a Secured Credit Card 

Understanding Credit Scores

Credit scores are calculated from the information in your credit reports. And there are hundreds of different credit-scoring models in use. So, you actually have many credit scores, not just one.

Some scores are proprietary systems that lenders create for themselves, and others are well-known, such as the FICO, which stands for the Fair Isaac Company, which created it. But even FICO offers dozens of different scores. There are newer versions and some just for specific types of products, such as mortgages, credit cards, and auto insurance.

FICO...

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