How to Build Credit: The Ultimate Guide
Your credit impacts your life in more ways than you might think. Not only can a bad score limit your access to affordable financing, but it can also be a red flag to prospective employers, landlords, and even romantic partners1. Fortunately, no credit score is so low that you can’t fix it. If yours isn’t quite where you want it to be, here’s everything you need to know about how to build credit.
1. Check Your Credit Report and Dispute Any Errors
If you already have an established credit history, check your credit report before applying for any additional accounts. You can get a free copy from each major credit bureau once every 12 months through AnnualCreditReport.com.
These reports contain all the information lenders use to calculate your credit score, including your current and historical credit usage. As a result, they provide valuable insight to refine your credit-building strategy.
In addition to using your credit report for planning purposes, double-check that all the details are accurate. One of the more disappointing credit score statistics is that roughly 34% of consumers have at least one error in their credit report.
If you have an error that has to do with your credit accounts, it could materially impact your credit score. For example, you might find that the balance on an old credit card you paid off still shows up, artificially inflating your outstanding debts and credit utilization.
If you find errors like these, you can dispute them with the credit bureau responsible for the report. Fortunately, Experian, Equifax, and TransUnion all make it relatively easy to do so online.
2. Get a Secured Credit Card
Secured credit cards are one of the best tools for building credit, whether you’re starting from scratch or recovering from past mistakes. If you don’t have any revolving credit yet, they should probably be the first account type you consider.
In most ways, secured cards function identically to traditional credit cards. You can use them to complete your daily transactions, and they often provide modest cash back rewards.
However, you must provide the credit card issuer with a refundable cash deposit to qualify. Typically, the amount is equal to your eventual credit limit. That way, the credit card company can use the funds as collateral and cover their losses if you ever default.
As a result, a secured card should be accessible to you, regardless of your credit history. Saving up a lump sum for the deposit can be challenging for some, but you can find accounts that require as little as $200.
If you can’t afford to save that much right now, it’s probably best to avoid taking on new debt until your finances are more secure. Otherwise, you risk missing payments and damaging your score.
In addition to being accessible to people with bad credit, secured credit cards are often free if you pay your statement balance before each due date. Just make sure to get one with no annual fee.
3. Get a Credit Builder Loan
The diversity of your credit mix is worth 10% of your FICO Score 8, the most popular score among lenders. In other words, you must have revolving and installment debt accounts to maximize your creditworthiness.
Revolving debts provide reusable credit lines, while installment debts provide a single lump sum upfront. For example, student credit cards and home equity lines of credit are revolving, while a student loan, personal loan, and car loan are all installment credit.
Typically, it’s unwise to take out installment debt to build credit since they’re hard to qualify for and expensive without an excellent credit score. Fortunately, credit builder loans help you get around those issues.
Like secured credit cards, credit builder loans use collateral to give the provider greater security. However, they use the loan proceeds instead of a cash deposit from the borrower.
As a result, you don’t have to bring any cash to the table, but you can’t use the secured loan to finance a purchase or a debt consolidation.
Fortunately, credit builder loans usually don’t require that you undergo a credit check, so you can qualify for one with a poor credit score or limited credit history.
After you open your credit builder loan, you make the usual monthly principal and interest payments, which the provider reports to the credit bureaus.
Once you’ve paid off the balance, the provider returns your principal payments, and you’ll finish the process with additional payment history and extra cash savings.
CreditStrong offers customizable credit builder loans that you can cancel at any time without penalty. Take a look at our account options and give one a try today!
4. Pay Your Bills on Time
Building credit requires using a diverse mix of credit accounts responsibly, which primarily means making your monthly payments on time. Your payment history is worth 35% of your FICO Score 8, making it more impactful than any other scoring factor.
As a result, you must do everything you can to make each monthly payment on time and in full. Even one missed payment can damage your score significantly and stays on your credit report for seven years.
Fortunately, while each lender has a unique policy for penalizing a late payment, they generally won’t report you to the credit bureaus until you’ve been delinquent for 30 days.
You only have to make the minimum monthly payment to appease them, but it’s usually a bad idea for revolving credit accounts since you’ll incur significant interest charges.
Not only will that increase your financial burden and make it more likely that you’ll miss future payments, but it’ll increase your outstanding debt balance, which can also damage your score.
5. Pay Off Debt
Your outstanding debt is the second most significant factor impacting your credit score. It’s worth 30% of your FICO Score 8, making it only slightly less important than your payment history.
Generally, this scoring factor accounts for the fact that you can only take on so much debt before you’re unable to afford further credit. As a result, paying down your outstanding balances increases your score.
If you already have a significant amount of debt, consider reducing it before you try to get more credit. You’ll save the most money and get out of debt fastest by prioritizing the account with the highest interest rate.
Paying off debt also reduces your credit utilization ratio, which lenders use to get context for your outstanding balances. It equals the amount you owe divided by your available credit limit.
For example, a credit card account with a $1,500 balance and $3,000 credit limit has a 50% credit utilization ratio. Conventional wisdom states your score should be fine if your ratio is below 30%. However, it should be between 1% and 10% for optimal results.
6. Become an Authorized User
Becoming an authorized user is one of the quickest and easiest ways to build credit. It involves having someone add you to their credit card line, adding its history to your credit report, and giving you the ability to borrow against it.
However, authorized users aren’t responsible for paying the card’s balances. As a result, there’s some risk involved for the primary cardholder, and you can typically only become an authorized user on a card of someone who trusts you.
Parents often add their children as authorized users in young adulthood to help them build an initial credit foundation. The process is easy to complete online, and there’s never a credit check involved.
You can pay strangers to add you as an authorized user, but it’s probably not a good idea. Not only is it harder to confirm that they’ll keep the account in good standing and protect your score, but lenders and the credit bureaus frown upon the practice.
7. Request a Credit Limit Increase
Paying off your outstanding debts lowers your utilization ratio and improves your credit score. However, you can only pay off debt so quickly, and not everyone has enough cash flow to pay more than the minimum amount due.
Fortunately, you can also improve your credit utilization ratio from the opposite end. Instead of reducing your debt balance, you can increase your credit limit.
For example, say you have $2,500 of credit card debt on an account with a $5,000 credit limit. Your credit utilization ratio is 50%, but you request a limit increase from your credit union. Your borrowing power goes up to $7,500, reducing your utilization to 33%.
While this isn’t a tactic you can use very often, it’s worth considering if you’ve kept a credit card in good standing for a year or two. The best way to request the increase is to call your card issuer directly.
8. Keep Credit Cards Open
The length of your credit history is the third most impactful credit scoring factor, worth 15% of your FICO score. It probably won’t make or break your creditworthiness, but it’s still significant.
Generally, this factor accounts for the fact that a lengthier credit history means you have more experience managing debt. As a result, the longer your credit history and the older your credit accounts, the better your score.
FICO incorporates all of the following into your creditworthiness:
- Age of each credit account, especially your oldest and newest
- Average age of all your credit accounts
- Length of time since you’ve used each credit account
As a result, it’s best to keep your credit cards open indefinitely and use them intermittently, even if it’s for a small transaction.
9. Be Careful With Credit Applications
The fifth credit scoring factor is worth 10% of your FICO score. It incorporates any recent hard credit inquiries into your score, which you incur each time you try to qualify for a new credit account.
Generally, this factor’s purpose is to account for the fact that applying for too much debt at once is a red flag to lenders. It indicates that you’re under financial stress, which makes you a riskier lending prospect.
Fortunately, FICO only counts credit inquiries from the last twelve months, and they drop off your credit report after two years.
Ideally, you should limit your credit applications to one every six months. Your score shouldn’t suffer too much if you go slightly over, but racking up half a dozen inquiries in one month could have a fairly drastic effect.
10. Monitor Your Credit
Once you have a diverse credit mix and the cash flow to make your payments on time, building credit is primarily a test of discipline. As long as you continue using your accounts responsibly, you’ll have a good credit score eventually.
During this phase of the credit building process, it’s a good idea to check your progress regularly using credit monitoring services.
Fortunately, you can get regular credit score updates for free from most creditors. For example, CreditStrong provides a free copy of your FICO Score 8 each month while you have one of our credit builder loans.
Alternatively, you can get monitoring services through a provider like Credit Karma or Credit Sesame as well.
How Do I Begin To Build My Credit?
If you’re building credit from scratch, the best way to start is to acquire a revolving credit account and an installment loan, then use them responsibly. Generally, that means making your monthly payments on time and utilizing less than 10% of your card limit.
It’s hard to qualify for the best credit cards without a good credit history, but you should be able to get a secured credit card despite having no previous credit history. And, of course, credit builder loans don’t require a credit check.
What Is the Fastest Way To Build Credit?
Building credit takes time, but there are a few ways to boost your score in a relatively short period. For example, those include:
- Paying down a significant amount of debt
- Increasing your credit limit to reduce your utilization ratio
- Using reporting services to add years of rental history to your credit reports
That said, it’s usually best not to rush the credit building process, as taking shortcuts can get you in trouble. For example, credit repair services that promise to build your credit fast are often scams.
How Can I Build My Credit in 30 Days?
Building credit in 30 days is often difficult since most lenders report to the credit bureaus monthly. However, you can improve your score in a single reporting period by lowering your credit utilization.
Typically, the best way to do that is to pay off a meaningful amount of your outstanding debt. However, you can also get similar results by requesting an increase of your credit limit.
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