In this lesson, we'll cover the basics that will help you build a good credit history. These include:

• The importance of your credit history.
• What credit reports and credit scores are and how they affect you.
• Tips for using credit wisely.

A good credit history (paying regularly and on time) will help you qualify for the lowest rates for loans, which will increase your savings and increase your wealth.

Remember the definition of net worth, or wealth?

Assets — Liabilities = Net Worth

Liabilities are your debts. Debt reduces net worth.

Know What Creditors Say About You

Those who have used credit will have a credit report that shows everything about their payment history, including late payments.

When making the decision to extend credit, lenders use credit reports and scores and a variety of other information such as employment and income history.

The information in your credit report is used to create your credit score. A credit score is a number generated by a statistical model that predicts the likelihood that you will repay on time.

The most important factor in a credit score is the payment history, which shows how credit accounts were paid and whether they were paid on time or late.

What's on Your Credit Report?

An important first step in getting the credit you deserve is to check your credit report.

You can request a free copy of your report once a year. Review your reports to make sure all information is accurate.

If you find an error, the Fair Credit Reporting Act requires credit reporting companies and those reporting information to them to correct the mistake.

Repairing Your Credit

Beware of credit repair services that claim they can erase your bad credit. Many of these are scams.

The Federal Trade Commission outlines how to dispute credit report errors and has a sample dispute letter on its website.

There's no quick fix, but you can improve your credit with time and effort and dedication to your plan.

Tips for Building Credit and Controlling Debt

• Develop a budget and stick to it.
• Save money so you're prepared for a rainy day. Three to six months of living expenses are recommended.
• Pay your bills on time. Be consistent with your payments.
• Keep your credit card balances low and aim to pay them off monthly.
• Check your budget before charging a purchase.

Before extending your credit and taking on more debt, remember to:

• Always check your budget first.
• Consider your balance sheet and net worth.
• Obtain your credit score well before you apply for credit.

Lessons Learned

Now you know why building a good credit history is so important.

You also learned how to use credit reports to understand what creditors know about you and some tips for using credit wisely.

Next, you will learn more about managing credit and controlling debt.