The best way to build a credit score

This post comes from Tim Sullivan at partner blog Get Rich Slowly.

I recently had dinner with my friend and fellow 20-something, Gwynn. When the check came, I put down plastic; she put down cash. The following conversation followed:

Gwynn: Would it be easier to just take the cash and put it all on your card?

Me: No, I'll just have him split it. I tend to do this awesome thing where I take the cash, thinking I'll get the miles, and then spend the cash on whatever. When the bill comes a month later, I'm wondering why I spent $50 on dinner for myself.

Gwynn: I just don't trust those things.

Me: Credit cards?

Gwynn: Yeah, never had one, never will.

Gwynn and I kept talking and not only has she never had a credit card, but:

• The only school loan she took out was directly from her father.
• She's never had a car payment.
• She's never had a mortgage.

Do you know your score?
Gwynn has worked at the same nonprofit since graduating college and saves with every paycheck. When a big purchase comes up, whether it be a plane ticket or a vacation, she saves and pays out-of-pocket. For her lifestyle, it works great.

That said, after our conversation, I got curious about her credit score, and Gwynn said she had no idea what it was or really what a credit score is. According to the 2011 Consumer Financial Literacy Survey by the National Foundation for Credit Counseling, two in three adults haven't checked their credit score in the past 12 months, and one in three have no clue what their score is.

I've had a credit card for years now and find it helpful in pursuing my long-term goals, like buying a home. Although length of credit history is only 15% of a FICO credit score, I still consider my credit card as my No. 1 way of building solid credit, and perhaps more importantly, establishing good credit habits for the future.

Quick overview of credit scores

Let's review the anatomy of a FICO credit score. There are a few categories that determine your final number. All you Gwynns out there, lend a quick ear:

• Payment history (35%).
• Credit utilization, or how much of your credit you're using (30%).
• Length of credit history (15%).
• Recently issued credit (10%).
• Types of credit used (10%).

A FICO score serves as a quick reference guide for lenders to determine the risk level for them to lend money. It's a number between 300 and 850, the higher the better. In short, a high score indicates less risk, therefore earning the borrower a lower interest rate and less overall cost.

By maintaining good credit from now until the purchase date of my home (whenever that may be), I will lower my monthly mortgage payment and end up saving myself thousands of dollars in the long run. (Post continues below.)

What are Gwynn's options?
Building a solid credit score with my card is working for me. I know my habits, like how I shouldn't take cash from friends at a restaurant to get the miles on my card.

But if Gwynn wants to start paying attention to her FICO score, what are her alternatives to credit cards? I called Gwynn and asked her if she had looked up her score with myFICO since we talked. She had, and found that she had no credit record at all, making her one of 22 million Americans who don't, says Craig Watts, public relations director at FICO. He says an additional 30 million have very thin files.

Gwynn says her cardless system is working for her now, but she still wants to build her credit. What are her options?

• According to the FICO website, she can take out a small personal loan from her bank. She already has established a good relationship with her bank and should be able to get a small personal loan. When she pays it off quickly, her credit record will start to grow. However, this seems like debt for debt's sake. This isn't what I would choose in order to build my score from the ground up.
• According to FICO, another solution is to get a secured credit card. A secured credit card involves putting down a given amount of money as collateral ($200 on the low end), and your line of credit is equal to the initial money down. Here's a great article that includes suggestions for specific cards with low annual fees.

A third option? Get a credit card and use it only for automated expenses. Yes, this option involves opening a credit card, but she could limit its use to a few automated payments. In about an hour, Gwynn could set up her card to automatically pay for her utilities, cable, and Netflix (or whatever else), and then automate a payment from her checking account to pay off her credit card in full. She'll get emails before transactions go through telling her everything is working like clockwork.

She can put her card in an ice cream carton filled with water and stick it in the freezer if she wants. She can give it to her father and say, "Never ever give this to me ever." She won't have access to the numbers, but will still be building credit.

An alternative to the credit card alternatives?
There is a philosophy growing in popularity that having no FICO score is just fine, that everything should be paid without using credit, including a house. There are also alternatives to standard loan approval, such as a bank doing manual underwriting. There are a few forums that discuss pros and cons, such as this one.

• Smart Spending on the go: Get our app for Android or iPhone

I can understand the philosophy that all purchases, including very large ones like houses and cars, should be made with cash. As with all things personal finance, you have to do what works for you, just as Gwynn does what works for her. I, on the other hand, like how credit cards are improving my creditworthiness.

What ways do you recommend for taking a credit score from zero to hero? Do you think of your credit score as a friend, a necessary evil, or something you can live without?

More on Get Rich Slowly and MSN Money:

• Anatomy of a credit score
• Proper care and feeding of your credit score
• Reader story: My falling credit score (and why it's not the end of the world)
• Estimate your credit score for free
• 7 nasty credit myths that won't die
• Calculator:How much house can you afford?