How To Build Credit

Understanding how to build credit is an important financial skill. Your credit history and score help you access loans, credit cards and other financial products. Not only does a good credit score enhance your financial opportunities, but it can also lead to cost savings through lower interest rates and reduced fees. Below are 10 simple steps to guide you in building your credit. 

Main Takeaways: How to Start Building Credit

• Credit measures your financial trustworthiness based on your past and current behavior with borrowed money.
• Good credit can help you qualify for better financial opportunities and save money in the long run.
• To build credit, you must use credit products responsibly and show that you can repay what you owe on time and in full.

Why Your Credit Matters

Credit offers you a way to borrow money from lenders and repay it later, typically with interest. Lenders check your credit history and score to gauge how likely you are to repay your debt — your creditworthiness. Your credit history keeps track of past and current credit accounts, like loans and credit cards and how well you've handled them. 

Maintaining good credit offers advantages such as accessing better loan terms, lower interest rates and increased negotiation power with lenders. It also enhances your chances of approval on rental applications, utility services and insurance policies.

In contrast, limited access to credit means you may only qualify for higher-cost options with more interest and fees. You might get caught in a cycle of growing debt and diminished savings. 

Different Ways to Build Credit

Here are 10 simple and effective ways to build or fix your credit.

1. Apply for a Credit Card

Applying for a credit card can provide you with a convenient way to make purchases and then pay later. A credit card gives you access to a line of credit you can use whenever you need. You can also build your credit score by showing how well you manage your debt and payments over time. However, these payments must be consistently made on time.

Great Beginner Credit Cards to Get Started on Building Your Credit

If you are new to credit or have a limited credit history, starting with a beginner credit card is a good idea to establish credit. Here are some of the best beginner credit cards that you can consider.

2. Get a Secured Credit Card

A secured credit card demands you put down a cash deposit as collateral. The amount of money you can spend is tied to this deposit, lowering the risk for the card issuer. The good news is that using a secured credit card can boost your credit because your payment history gets reported to credit bureaus. To make the most of it, pay your credit card bill on time and in full every month and aim to keep your balance low. 

Best Secured Credit Cards to Build Credit

If you are looking for the best secured credit cards to build credit, you can check out this list of some of the top options available.

3. Become an Authorized User on a Credit Card

Being an authorized user on a credit card means you can use someone else's credit card with their permission. Even though you get a card with your name on it, you're not in charge of paying the bill or handling the account. Still, you can benefit from the positive effects on your credit history and score if the primary cardholder uses the card responsibly and makes timely payments.

4. Get a Co-Signer on a Credit Card

Apply for a credit card with a co-signer with good credit. The co-signer agrees to pay the card balance if you can't and both of you share the legal responsibility for the debt. A co-signer can help you get approved for a credit card you might not qualify for alone or snag a card with better terms and a lower interest rate.

Having a co-signer can also boost your credit, provided you both use the card responsibly and make on-time payments. The issuer reports the account activity to credit bureaus for both of you, which can gradually improve your credit score.

5. Get a Credit-Builder Loan

A credit-builder loan is an installment loan designed to help you improve your credit. Unlike a regular loan, where you receive the money upfront and pay it back later, a credit-builder loan works in reverse. You make monthly payments to a lender, who keeps the money in a savings account or a certificate of deposit (CD) that you can access after you pay off the loan. The lender reports your excellent payment history to the credit bureaus, boosting your credit score over time.

6. Make On-Time Payments on Your Other Loans

Making on-time payments on your other loans, such as student loans, car loans, personal loans or mortgages, projects you as a responsible borrower capable of managing your debt obligations. Because your payment history accounts for 35% of your credit score, you significantly boost your credit score every time your payments come in before the due date.

7. Get Credit for Your Bill Payments

By default, bill payments usually do not contribute to credit reports and scores because they’re not reported. However, you can use services like Experian Boost to verify and report your payments to the credit bureaus. 

8. Consider Nonprofit Lending Circles

Another way to build credit is through nonprofit lending circles, such as those offered by Mission Asset Fund (MAF). A lending circle is a group of people who agree to lend and borrow money from each other on rotation. For example, if there are 10 people in a lending circle, each person contributes $100 every month and one person receives $1,000 each month. Payments are reported to the credit bureaus.

9. Maintain Responsible Credit Practices

Maintaining responsible credit practices helps build and improve your credit.

• Pay your bill in full and on time each month: Consistently paying your bill in full and on time shows lenders that you can manage your credit. You'll also dodge interest charges and late fees, preserving your credit score.
• Keep credit utilization low: Credit utilization is the ratio of your credit balance to your card limit and it significantly impacts your credit score. Aim for below 30% to show responsible credit usage.
• Be cautious with credit card applications: Applying too often can signal desperation to lenders and lower your credit score. 

10. Monitor Your Credit Scores and Reports

Your credit scores show how risky you are as a borrower based on the information in your credit reports. These reports are detailed records of your credit accounts, payment history, inquiries and public records. Keeping an eye on your credit scores and reports can help you:

• Understand how your credit behavior affects your scores over time
• Find areas where you can improve your credit habits and scores
• Catch and fix any errors or mistakes on your credit reports that might hurt your credit
• Spot and prevent identity theft or fraud on your credit accounts

How Long Does it Take to Build Credit?

Building credit can take a few months to a few years, depending on where you start. If you have no credit history, it might take a bit longer.

Using credit products regularly and responsibly can speed up the process. Having different types of credit products can also help you build credit faster than sticking to just one. But be cautious about applying for new products too often, as it might slow you down.

Factors That Affect Your Credit Score

FICO is the most common credit score system and uses a 300 to 850 range, with higher scores indicating lower credit risk.

Your credit score is based on factors that reflect your credit behavior and history:

• Payment history: This is the most important factor in determining your credit score. It reflects whether you pay your bills on time and how often you miss or make late payments. Payment history contributes to 35% of your FICO score.
• Credit utilization: It represents the percentage of your credit limit that you are using and how well you manage your debt. Credit utilization accounts for 30% of your score.
• Length of credit history: Your credit age and history show your experience with credit and how stable your credit behavior is. It affects 15% of your FICO score.
• Credit mix: Credit mix makes up 10% of your score and shows how well you handle different types of credit.
• New credit: New credit accounts or inquiries impact your credit score by showing how frequently you seek new credit. It affects 10% of your score.

Tips on Keeping a Good Credit Score

A FICO score of 650 or above is considered good, while a score of 800 or above is considered excellent. 

To keep or raise a good credit score:

• Pay your bills on time: This is the most important factor in your credit score. If you have missed payments, catch up and stay current.
• Keep your credit card balances low: Aim to use less than 30% of your available credit and ideally less than 10%.
• Check your credit reports regularly and dispute any errors: You are entitled to a free credit report from each of the three major credit bureaus once a year. Contact the credit bureau and the creditor to correct any inaccuracies or incomplete information.
• Maintain a mix of different types of credit: Have different types of credit accounts to show responsible debt handling, but avoid opening unnecessary accounts just to improve your credit mix.
• Use credit-building tools: If you have limited or no credit history, you can use products and services like secured credit cards, credit builder loans or rent and utility reporting programs to establish and improve your credit.

Building a Solid Credit Foundation

Establishing good credit is an important step toward financial stability and future opportunities. You can achieve this by making timely payments, using credit responsibly and keeping an eye on your credit report. Only borrow what you can afford to pay back and seek help from professionals if needed. With some effort and patience, you can build a healthy credit history that will help you get better borrowing terms and improve your financial prospects.

Frequently Asked Questions