Accounts That Build Credit
Your credit scores are based on the information in one of your credit reports from a credit bureau — either Equifax, Experian, or TransUnion. As a result, if you want a good credit score, you need to focus on improving the underlying information in your credit reports.
Creditors, such as lenders and credit card issuers, generally report installment and revolving accounts to the bureaus. However, there are also different types of accounts within each category.
Installment Accounts that Build Credit
Installment accounts are a common type of personal and business loan. With an installment loan, you’ll generally receive the loan amount as an upfront lump sum. Many installment loans have fixed monthly payments, and you’ll repay the loan over a predetermined repayment period. A portion of each payment may go toward paying interest, and the rest will pay down the loan’s principal balance.
Here are a few examples of installment accounts that you can use to build credit.
Credit Builder Loans
Credit builder loans, such as Credit Strong accounts, are installment loans that are offered specifically to help you build or rebuild your credit.
When you open a credit builder account, the funds are set aside in a secured savings account. Each month, you make a payment and the lender reports your account information and payment to the three major credit bureaus. These on-time payments can help you build a positive payment history and improve your credit scores.
Once you pay off the loan, the savings account is unlocked, and you’ll receive the funds plus any accrued interest you have earned. As a result, you can build your savings while you build your credit.
An auto loan — not solely loans for cars — is another example of a secured installment loan. The vehicle you buy will be collateral for the loan, and the lender can repossess the vehicle if you fall behind on your payments.
Generally, you can take out a loan through the dealership where you purchase a car, or you can apply for financing directly from a bank, credit union, or online lender. When you take out an auto loan, you may be able to select your repayment term, such as 36, 48, 60, 72, or 84 months. You’ll then repay your loan with installment payments over that period.
Most auto lenders will report your payments to all three credit bureaus. However, some smaller lenders, such as regional banks or local credit unions, might only report your account to one or two of the bureaus. As a result, you’ll only build credit at those bureaus.
Other Types of Installment Loans
In addition to credit builder loans and car loans, there are several other types of common installment loans:
- Personal loans: Personally loans are generally unsecured loans that people use to consolidate higher-rate debt, such as credit card debt, or pay for a specific purchase. For example, people may take out a personal loan to pay for moving, funeral, home improvement, or medical expenses.
- Student loans: Both federal and private student loans are unsecured installment loans. Federal student loans can be easy to qualify for, as undergraduate federal loans don’t require a credit check or income. Lenders will also report your account to the credit bureaus while you’re still in school, even if you haven’t started making payments yet.
- Mortgages: Home loans, or mortgages, are another common type of installment loan. Unlike personal or student loans, mortgages are secured accounts that use your home as collateral. Once you buy a home, you may be able to take out a second mortgage,which is either an installment loan (a home equity loan) or a revolving loan (a home equity line of credit).
There are other types of installment loans as well. For example, a business might take out an equipment loan to purchase a new piece of machinery. Similar to personal loans, the business will then repay the loan over time. If its creditor reports the loan to the business credit bureaus, it may even be able to establish business credit reports and scores, which are separate from the owner’s personal credit.
Revolving Accounts that Build Credit
Revolving accounts don’t have a predetermined loan amount. Instead, there’s a credit limit, which is the maximum amount you can borrow at a time. Your account balance increases as you borrow money, accrue interest, or are charged fees. However, you can decrease your balance and free up room in your credit line by making payments.
Unsecured Credit Cards
An unsecured credit card account is what most people think of as a regular credit card. The cards can come in many forms, such as cash back rewards cards, business credit cards, and premium cards that offer lots of benefits but have a high annual fee.
Most major credit card issuers will report your account to all three credit bureaus. In addition to making on-time payments, maintaining a low credit utilization ratio can be important for your credit scores.
Your utilization rate is calculated based on your revolving accounts’ balances and credit limits, as they appear on your credit reports. For example, a card with a $1,000 credit limit and $100 balance has a 10 percent utilization rate. If the balance increases to $500, the utilization rate goes up to 50 percent. Additionally, credit scores will consider your utilization rate on each card and your overall utilization from all your revolving accounts.
Paying down credit card balances may lead to a good credit score because it lowers your utilization rate. Ideally, you can shoot for a utilization rate in the low single digits, although some people use below 30 percent as a general rule of thumb.
A sometimes misunderstood detail is that credit card issuers often report your balance at the end of your statement period, which is often about three weeks before your bill’s due date for that period. As a result, you could have a high utilization rate (and be hurting your credit score) even if you pay your bill in full each month. To make up for this, you could use your card less often or make payments before the end of your statement period.
Secured Credit Cards
Secured credit cards are often a good option for people who are first building credit or have bad credit. To open a secured card, you’ll need to send the issuer a security deposit, which will often determine the card’s credit limit.
The security deposit limit’s the card issuer’s risk, which is why it can be easier to get a secured credit card than an unsecured card. However, both types of cards can help you build credit in the same way.
Family Members’ Credit Cards
Another option may be to become an authorized user on a family member’s credit card. If you do, some card issuers will report the account to the credit bureaus under your name and credit profile as well. It might help you build good credit if the other person uses the card responsibly. However, if they miss a payment or have a high utilization rate, that could also negatively impact your credit report. For this reason it’s almost always best in the long run to focus on building your own independent credit profile.
Personal and Home Equity Lines of Credit
You may also be able to get either an unsecured revolving line of credit, or a home equity line of credit (HELOC) that uses your home as collateral. In either case, your account may have a maximum available credit limit that you can borrow against multiple times, this is often called taking a “draw.” Some line of credit accounts come with cards or checks.
Some borrowers might use a line of credit rather than a credit card as they receive a lower interest rate and higher credit limit on the account. Lines of credit can also be a better fit than an installment loan as you’re able to take out multiple draws over time.
For example, you may be working on a home renovation project and need to make progress payments to the contractor. With an installment loan, you’d have to receive the entire loan amount upfront and start accruing interest right away or reapply for a new loan each time. But with a line of credit, you apply once and only pay interest on the amount you borrow, not your entire credit line.
Types of Accounts and Bills that Don’t Build Credit
Some regular and common bills don’t help your credit scores because the creditors usually don’t report the accounts to the consumer credit bureaus. However, you can sometimes find a workaround and use these payments to help you build good credit.
While rent is a common monthly bill, most landlords and property management services don’t report to the credit bureaus. As a result, paying rent won’t help your credit score.
There are third-party services that you can use to get your rent added to your credit reports. However, the arrangements can differ depending on the service.
Some services require landlords or property managers to sign up first. Others work directly with renters, although there may be an enrollment and monthly fee. If you’re signing up for a rent reporting service, look for an option that reports your rent payments to all three credit bureaus—some only report to one or two of the bureaus.
Bills That Don’t Come From Borrowing Money
Other common bills that usually won’t help you build credit include:
- Mobile phone payments
- Streaming services
- Gym memberships
However, there are some services that you can use to add some of these accounts to your credit reports. For example, Experian Boost is a free program you can use to link your bank account and add utility, phone, and select streaming service monthly payments to your Experian credit report.
Adding these accounts to your credit reports won’t necessarily increase all your credit scores. Some credit scoring models including the older FICO Scores that are commonly used in mortgage lending, can’t read these types of alternative accounts. As a result, these types of payments still won’t impact those scores.
Debit Cards and Prepaid Cards
While your debit card might have a Visa or Mastercard logo on it, and you can use it to make purchases online like a credit card, it won’t help you build credit. Unlike a credit card, which involves borrowing money and then paying a bill, your debit card is directly connected to your checking account.
Similarly, prepaid cards won’t impact your credit scores because they don’t involve borrowing money—you’re only able to spend what’s already been loaded onto the card.
1. Can you build credit without a credit card?
You can build credit by opening any type of account that’s reported to the credit bureaus. It could be a credit card, but you can also use other types of installment and revolving accounts to build credit. Having a mix of both installment and revolving accounts could be beneficial.
2. How do you build good credit fast?
Building good credit can take months or years. But one of the fastest ways to improve your credit is to have several accounts that are reported to all three credit bureaus and make on-time monthly payments. If you have a mix of installment and revolving accounts that may also help.
3. How can I build credit from scratch?
For many people, a credit builder loan, secured credit card, or student loan could be a good way to build credit from scratch. Once your account is open, make at least your minimum monthly payment on time to build your good credit history.
4. Should I get a credit builder loan?
You should get a credit builder loan if you want to build credit for the first time or rebuild your credit. Credit builder loans can also help you build credit and establish savings at the same time.
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