968. Laura reviews how to build excellent credit scores whether you’re starting from scratch, recovering from a credit hardship, or just want a credit boost to save money.
968. Laura reviews how to build excellent credit scores whether you’re starting from scratch, recovering from a credit hardship, or just want a credit boost to save money.
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Welcome back to episode 968 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances.
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Imagine you and a friend are both shopping for the exact same car, and you both get approved for an auto loan for the same amount. But your friend’s monthly payment is $50 less than yours. What gives? The difference comes down to your credit scores!
This post will review why great credit is essential for healthy finances and how to build your scores. We’ll cover seven tips to build credit whether you’re starting from scratch, recovering from a credit hardship, or just want a credit boost.
What are credit scores?
Credit scores are typically three-digit numbers, ranging from 300 to 850. The higher your score, the more creditworthy you appear to lenders and various merchants. It’s like a financial report card that’s a snapshot of your current risk.
For instance, having low credit scores typically makes a lender believe you’re a high risk because you’re more likely not to pay them on time. High credit scores tell the world that you’re financially responsible, are a low risk, and will likely pay what you owe on time.
There are many different credit scoring models; therefore, you have multiple credit scores. However, two scores that are commonly used in the U.S. are FICO and VantageScore. They have the same scoring range from 300 to 850, but weigh certain factors differently.
Here’s how to translate your FICO score:
As of mid-2025, the average FICO score in the U.S. is 715, which falls in the good category.
Here’s a breakdown of the VantageScore:
As of mid-2025, the average VantageScore is 701, which is also good. The average of both scoring models is down slightly this year, indicating that Americans are feeling more financial pressure in our complex economic environment.
READ ALSO: Know your score and improve your credit
How are credit scores calculated?
Your credit scores are calculated based on the information in your credit reports, which are maintained by the three major credit bureaus: Equifax, Experian, and TransUnion. They hold a detailed history of information reported by lenders and merchants.
Some of the most important factors that influence credit scores are your:
RELATED: Tips to minimize credit damage after a late payment
Why do you need good credit scores?
Different organizations, such as lenders, property managers, insurers, and the government, use credit scores to make decisions about offering you loans, credit cards, apartments, insurance, and certain government benefits. Higher scores result in lower interest rates and more favorable terms, ultimately saving you a significant amount over time.
Here’s an example of how having fair credit could affect a mortgage payment. Let’s say you buy a home for $350,000 and need to borrow $300,000. If you have excellent credit, your interest rate on a 30-year fixed-rate mortgage could be 6%.
However, if you have fair credit, your interest rate for the same mortgage could be 7.5%. Paying 1.5% more on a mortgage means you could pay $107,000 more in interest over the life of the loan. I don’t know anyone who wouldn’t want to save $107,000!
In addition to paying less interest on mortgages, auto loans, student loans, and personal loans, better credit gives you access to less expensive credit cards that come with more rewards. For instance, depending on the card issuer, with excellent credit, your interest rate could be 15% instead of 29% with lower credit scores.
Certain government-backed financial products also check your credit. They include FHA and VA loans, as well as Direct PLUS Loans, which are available to graduate or professional students and parents of dependent undergraduate students.
I mentioned that certain insurance premiums are affected by your credit scores. In most states, carriers that sell auto, home, and renters insurance use a credit-based insurance score as one factor in your rate. Data indicate that policyholders with higher scores tend to file fewer insurance claims.
Many utility and wireless phone companies also check your credit scores when determining whether you must pay a security deposit or not. And landlords check credit to ensure you’re financially responsible and likely to pay rent on time.
Even if you never plan on taking out a loan or using a credit card, you can see that your credit scores still affect your finances. Everyone who drives must have auto insurance, and few people can go without utilities, internet, or a wireless phone.
Don’t be shy about reviewing or downloading your credit reports for free, which never hurts your scores. Regularly checking your reports and scores at a site like Credit Karma is the best way to catch errors or fraudulent activity that could be dragging down your credit scores.
7 tips for excellent credit scores and more savings
Now that you understand the power of having excellent credit, let’s review seven tips for building and maintaining it.
1. You need credit accounts.
It's a common misconception that being debt-free gives you excellent credit. If your credit reports have too little or no data, they can be too "thin" to generate scores. Unfortunately, having no credit score is the same as having poor credit.
The bottom line is that you must have credit accounts in your name and use them responsibly to build excellent credit. So, apply for credit accounts you genuinely need and can manage wisely.
2. Always make timely payments.
Since your payment history is typically the most significant factor in credit scoring calculations, paying your bills on time is critical. Even if you can only send your credit card's monthly minimum, paying on time builds a history of positive data in your credit reports. Likewise, making even one late payment can significantly hurt your scores.
3. Don’t close credit accounts.
If you pay off a revolving credit account, such as a credit card or line of credit, keeping it open is better for your credit than closing it. That's because closing an account shrinks your available credit, causing your credit utilization to skyrocket.
Your credit utilization is a ratio calculated by dividing your outstanding balance by your available credit. For example, suppose you have two credit cards that each have a $4,000 credit limit. If you owe $0 on the first card and $2,000 on the second, your total credit utilization ratio would be 25% ($2,000 / $8,000 = 0.25)
If you close the first card with a $0 balance, you instantly lose half your available credit, causing your credit utilization to double to 50% ($2,000 / $4,000 = 0.50). Such a significant increase in your ratio causes your scores to drop quickly
Having more available credit relative to your debt is better because it boosts your credit scores, which indicates responsible credit use. Cutting your available credit makes your scores drop so you appear less creditworthy, even if you're not.
LISTEN ALSO: Should I cancel unused credit cards?
4. Don’t carry unnecessary credit card debt.
It's a common myth that you must take on unnecessary debt to improve your credit scores. When you need credit accounts, the upside is that you can build credit by managing it responsibly.
An excellent credit-building strategy is making credit card charges that you pay off in full each month. That allows you to avoid interest charges, get card benefits, maintain a low credit utilization ratio, and add positive payment data to your credit reports that boosts your scores.
5. Consider using a secured credit card.
Credit can often feel like a catch-22 where you can't get approved for credit cards and loans without having good scores, but you can't build good scores without having credit accounts. The savvy way to build credit from scratch is by applying for a secured credit card.
Secured cards function similarly to standard cards, but they require an upfront refundable deposit that serves as your credit limit. After you make on-time payments for a period, you typically qualify for a regular, unsecured credit card.
Just be sure a secured card reports payment data to nationwide credit agencies. Otherwise, your payment history won't get recorded in your credit files, and you won't have the opportunity to build your credit scores.
6. Have a mix of credit accounts.
Your credit mix, or the types of accounts you have, contributes to your credit scores. While it's not as significant as your payment history, it's part of the calculation in most scoring models.
For instance, having revolving accounts (such as credit cards) and installment loans (like auto, student, and home loans) demonstrates your ability to manage various types of credit effectively.
As I previously mentioned, having multiple credit cards increases your total available credit, reducing your utilization ratio and boosting your scores. In addition, every account you own adds to your credit history, another scoring factor. However, I don't recommend opening new credit accounts you don't need or would have difficulty managing responsibly just to improve your credit mix.
RELATED: How to pay off credit cards when money is tight
7. You need patience.
Improving your credit scores never happens quickly, nor is there a magic fix for poor credit. If you're starting from scratch or rebuilding after a financial hardship, it will likely take at least six months for your credit scores to increase.
Building credit can take longer if you’ve had accounts in collections or a bankruptcy. However, scores typically give more weight to your recent account activity.
How often your credit scores update depends on when creditors report information to credit agencies. Generally, your account data gets updated monthly, which means your scores can change monthly.
The best way to improve your credit is to pay bills on time, keep your debt balances as low as possible, and periodically review your credit reports for errors. If you find any incorrect information, such as late payments or accounts that aren’t yours, dispute them with the credit bureaus immediately.
Going back to my opening example about getting the same auto loan as a friend: if you want a lower monthly car payment, your credit scores are the key! By following these tips, you can save money not just on a car, but on many other expenses, and reach your financial goals faster.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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