Building credit and maintaining a good credit score are key steps in many financial journeys. Good credit can open doors to important life goals—like going to college, buying a home, or purchasing a car—since these big purchases often require loans. If you’re thinking about taking on debt for the first time, you might not be familiar with how credit scores work or how they can affect your buying power. Read on to learn the basics and how you can start building credit from the ground up.
What is a credit score?
A credit score is a quick way for lenders to determine how likely you are to repay money that you borrow.1 Ranging from 300 (poor) to 850 (perfect), your credit score will determine your interest rate, the terms of your loan, and even how much you can borrow. The credit scale is as follows:
Poor (300-579): Scores in this range are considered “risky” by credit agencies. You may be rejected as a candidate for credit cards or loans. If you can borrow funds, you may be required to pay a fee or provide collateral to do so.
Fair (580-669): You may be more likely to be approved for a loan, but you’re also more likely to pay higher interest rates, as you would still be considered a “subprime borrower.” Lenders charge higher interest rates to offset the risk they take when loaning to individuals with fair credit scores.
Good (670-739): There is little risk that you will default on your loan, so lenders consider these scores to represent “good borrowers.”
Very Good (740-799): You are likely to qualify for most loans and credit cards, as well as get competitive interest rates.
Excellent (800-850): You will qualify for larger loans at lower interest rates.
What impacts my credit score? How can I keep a good score?
Several factors are considered when calculating credit scores. Below are some of the factors, as well as best practices for maintaining a good score.
- Paying your bills consistently and on time is the easiest way to build good credit. Late payments, defaulting on loans, and bankruptcy will drag your score down. Pay your credit cards in full each month if possible.
- Credit utilization, or the amount of credit you’re using of your total available credit, is also an important factor. You’ll want to keep this ratio under 30%, as your credit utilization is treated as a reflection—and future indicator—of your debt management. (Installment credit such as mortgages or car loans with set payments each month is not included in the credit utilization ratio.2)
- Your credit mix, or the variety of credit sources you have, such as credit cards, mortgages, student or car loans, and direct lines of credit impacts your score. While variety is good, limit the number of credit applications you’re applying for. Opening multiple lines of credit in a short period of time indicates to lenders that you spend more than you have. Four to six months is a good amount of time to wait between credit applications.
- The length of your credit history and how long your accounts have been in good standing also impact your credit score.
You should review your credit report regularly to ensure there are no issues. Per federal law, you can access a free copy annually through one of the three credit reporting agencies (Equifax, Experian, TransUnion).3
How can I build credit?
It can be hard to get a loan if you don’t have a credit history, so here are a few options for getting started.
- Open your first credit card. Pick one with no annual fee and pay it off each month.
- Consider becoming an authorized user on someone else’s credit card.
- When applying for a loan, consider getting a family member or other trusted individual to cosign.
Knowing you have a healthy credit score means you can prioritize your financial goals, especially when it comes to taking out loans to accomplish them. Reach out to a D.A. Davidson financial professional with any questions about credit scores, or how yours can affect your borrowing power.
1 Experian
2 Quicken
3 USA Gov
This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2025. All rights reserved. Member FINRA and SIPC.