How to Build Credit—Even if You’re Just Getting Started
To build credit, you can apply for a secured card, become an authorized user, work on paying down existing debt, and make sure you make all payments on time. You can also use a service that reports rent or utility payments to credit bureaus.
Life is hard if you don’t have credit. Most landlords, lenders, and other companies like to check your credit report before doing business with you, and you may have to pay higher interest rates or find a co-signer if you don’t have good credit.
If you’ve never borrowed before, you may need to establish credit in order to get approved for a loan or credit card in the first place. Or, if your FICO credit score isn’t great because of late payments and other mistakes you’ve made in the past, you may need to take steps to rebuild credit over time.
This guide will cover ways to build credit regardless of your current score or credit history.
In this guide:
4 Ways to Build Credit from Scratch
These tips are best for people who are just getting started establishing credit for the first time, but they could potentially also work for those whose credit score has taken a dip and is in need of repair.
1. Take Out a Credit Builder Loan
A credit builder loan is a specific kind of loan that’s intended to be used for building credit, rather than as a way to borrow money. With a credit builder loan, you apply to borrow a set amount from a lender offering this kind of loan. If you’re approved, you start making monthly payments on the loan—but you don’t actually receive the loan balance.
You will need to keep making your payments on schedule as agreed with the lender and your payment record will be reported to the major credit bureaus—Equifax, TransUnion, and Experian—so you develop a positive payment history. After you’ve paid off the loan as agreed upfront with the lender, you’ll get to access the money you “borrowed.”
Usually, you do pay interest to the lender with a credit builder loan, even though you aren’t getting the loan funds until the loan has been paid back. However, many lenders give you back interest payments, minus any fees or costs assessed when your credit builder loan has been successfully repaid.
Not all lenders offer credit builder loans, so shop around to see if you can find one that will provide this kind of financing at an affordable cost.
2. Apply for a Secured Credit Card
Credit cards are a good tool for building credit because they give you access to a different kind of credit than other loans. It’s best to have a mix of different credit types to get the best credit score.
>> Read More: How to Build Credit With a Credit Card
A credit card also gives you the chance to make regular payments that are reported to credit bureaus, and to show you can keep your credit utilization ratio down to a reasonable portion of your total credit limit—both of which are important to your credit score. Many credit cards also come with rewards and other generous perks.
If you don’t have established credit yet, it will be hard for you to qualify for a traditional credit card. The good news is, secured credit cards are built specifically for people with poor or limited credit.
Secured cards set your credit limit at an amount equal to a security deposit you make when you’re approved for the card. Apart from that, they work in a similar way to a standard credit card. You can use the card over and over to make charges up to your credit limit and will receive monthly bills as you use the card. You should pay your bills on time and in full, and your record of payments will be reported to the credit bureaus so you can build credit. After six months to a year of responsible use, you may be able to upgrade to a standard credit card.
3. Become an Authorized User
If your parents, spouse or partner, or other family member have a credit card and have good credit, they can add you as an authorized user to improve your own credit. This would mean you would be allowed to use their card as if it were your own, and the new credit line will show up on your credit report. They don’t even have to actually give you the card if they don’t want you to use it, just adding you as an authorized user is enough for the credit card account to show up on your credit report. Your own credit will be improved over time as long as they pay their bills on time.
>> Read More: The Best Credit Cards for Authorized Users
4. Use Credit-Reporting Bill Pay Services
There are many bills you probably pay each month that aren’t reported to any credit reporting agencies, including utility or cell phone bills and rent. It’s unfortunate that, up until now, you haven’t been able to easily use your record of paying these bills on time to improve your credit. The good news is, that’s changing. Experian now offers Experian Boost, a service that allows you to build a good credit history with Experian simply by being responsible with bills you’re already paying.
>> Read More: How to Report Rent Payments to a Credit Bureau
Best Practices for Maintaining Good Credit
Whether you are hoping to establish credit, raise your credit score, or simply maintain the good credit score you’ve already earned, here are a few good habits you should try to maintain.
Pay Off Your Existing Debt
There are two kinds of credit that you may have on your credit report: installment loans and revolving credit.
Installment loans, such as mortgages and student loans, are intended to be paid off over a fixed term on a set schedule. While paying this type of loan off early could help you reduce overall debt, save on interest, and free up money for other uses, early payoff of installment debt isn’t likely to help your credit as much as other types of debt. As long as you pay these bills on time, they don’t do much damage to your credit score.
Revolving debt, such as the debt you carry on a credit card, is different. Revolving credit is available to you, up to your credit limit, but you don’t have to borrow up to the full amount you’re allowed. In fact, if your credit utilization ratio exceeds 30% of your available credit, your credit score will take a hit. Excessive borrowing on a line of credit is viewed as risky by credit reporting agencies.
Because of this, keeping your credit utilization well below that 30% benchmark and paying off any outstanding credit card balance on time and in full each month should help to improve your credit score.
Check Your Credit Report for Errors
Another key way to maintaining a good credit score is to make sure there are no mistakes that cause your score to be lower than it should be. You can check your free credit report periodically to see how your accounts are being reported and what factors might be affecting your score. And you should look carefully to see if there is anything wrong on your report, such as balances being reported as outstanding even though you have paid them off or accounts in your name that you didn’t open.
Mistakes on a credit report are far too common and can happen because of identity theft, when someone with a similar name has their information reported on your report, or simply because of an error made by your credit card issuer. You don’t want your credit to be hurt and your finances to be affected due to any inaccuracies.
If there are any mistakes on your credit report, you can notify the credit reporting agency that is displaying the incorrect information. They will investigate and, if the information is found to be inaccurate, it will be removed from your credit report.
Bottom Line: Building Credit Takes Time, But Everyone Can Do It
Building credit isn’t something that can happen overnight. Building credit takes time and requires you to make responsible borrowing decisions over many months or years. But it’s no mystery how to get a good credit score—you simply have to make on-time payments, keep your credit utilization at a reasonable level, and make sure that you have a mix of different kinds of credit. Applying for a secured card or credit-building loan are good ways to get started, so you can begin developing a positive credit history right away.
Need more info? Read about how to build good credit.