How to Build Credit

Updated on April 9, 2024

For many new residents of the United States, building credit is an essential aspect of securing your financial future. Credit is used in many financial decisions, and one should start building credit as soon as they can.

Since credit can be a complicated topic, we’ve put together this guide on helping you begin building credit. Here you will find everything you need to know on what credit is, and how you can begin building your own credit.

What is a good credit score?

Credit scores have a range between 300 and 850, and most people have credit scores that fall between 600 and 750. A credit score of 700 or above is generally considered a good credit score.

Higher scores show that you are likely to make better credit decisions and will make creditors more confident that you will pay back any future debts. Bad credit scores can make credit lenders less likely to lend money to you, or they will charge higher interest rates. And having no credit score at all will compound those issues even more – finding a loan with no credit history or a personal loan with bad credit is difficult (but possible!) and costly.

Speaking of no credit history, it’s also important to know the difference between having no credit and having bad credit. Learn more about the two in our guide: No Credit History vs Bad Credit: What’s the Difference and How Do You Fix it?

In any case, good credit is necessary if you need to use credit to make a major purchase or expense, such as a home or college tuition. Good credit can also make you a better applicant when wanting to rent a home.

5 ways you can build credit

There are many ways you can establish and build your credit score. Here is our list of the top 5 ways you can establish credit.

1. Get a Secured Credit Card

A secured credit card is used just like any other credit card, however, it is approved through a cash deposit that you pay upfront. This deposit then becomes your credit limit. Secured credit cards are great for those new to credit since it can build credit for those who wouldn’t likely be approved by an unsecured card.

2. Get a Credit Builder Loan

A credit build loan is a loan for those looking to build credit. These loans are placed in a savings account on your behalf which you pay off in monthly payments. After the loan is paid off in full, you will receive the money in the savings account to keep. This option allows you to build credit as well as your own personal savings.

Paying off a loan like this shows creditors that you have a history of making financial decisions responsibility and will build your credit score.

3. Find a Cosigner

A cosigner can make you eligible to get a low-cost loan or an unsecured credit card despite not having any credit history yourself. However, the cosigner is often required to meet high standards such as being a US citizen and having a high credit score themselves. A cosigner will also become responsible for any debts you incur if you end up not paying them back yourself. Finding a cosigner can be difficult but well worth the trouble.

4. Become an Authorized User

Becoming an authorized user on a credit card allows you to build a credit history without having a credit card account yourself. An authorized user is someone who is added onto another person’s card who is allowed to make purchases with the card but is not responsible for making the monthly payments on the card.

Oftentimes a family member or significant other may be willing to add you as an authorized user on their card if you choose to not open a card yourself.

5. Report Rent to Credit Bureaus

Paying your monthly rent on time demonstrates your strong financial behavior and can be used by credit agencies to determine your credit eligibility. By using a rent reporting service, your monthly rent can be factored into your credit report which will help build your score. You can learn more about this strategy here.

These, of course, are not the only strategies for building credit. If you have student loans, there are more ways to explore.

5 Good Habits to help Build your Credit

Raising your credit score is best done by setting good habits for yourself to show a history of strong financial responsibility. Your Credit Score is impacted by 4 major things:

Payment History (35% of score)

  • On-time payments vs late payments
  • Severity of delinquent payments (30, 60, 90 days late)
  • Public records like bankruptcies and judgments

Credit Utilization (30% of score)

  • Ratio of credit balances to total available credit limits
  • Generally want to keep utilization below 30%

Credit History Length (15% of score)

  • Typically based on average age of all accounts
  • Older histories tend to increase scores

New Credit (10% of score)

  • Opening new accounts can lower average age of history
  • Numerous recent inquiries can slightly ding scores

Credit Mix (10% of score)

  • Mix of installment loan accounts (mortgage, auto, student loans) vs revolving accounts (credit cards)

So payment history and credit utilization ratio tend to be weighted most heavily. Maintaining low balances relative to limits and making consistent on-time payments are key to maximizing scores over time. Here are just a few habits you should be doing to build your credit.

1. Make Payments on Time

All of your monthly payments, such as rent, utility, credit card, and loan payments, should be made on time. Unpaid bills can be sold to a collection agency which will be detrimental to your credit score.

2. Don’t Use Too Much Credit

Credit utilization is how much of your credit limit that you use each month. By keeping your credit utilization low, creditors will view you as a safer borrower, and this will pay off in your credit score. Keeping your credit utilization low can be done by paying off your balance in full and keeping your card balance less than 30% of your total credit score.

3. Don’t Open Too Many Accounts

New accounts lower your average account age which is used to determine your history of credit. Since having a longer credit history is better for your credit score, try to avoid opening too many accounts at once.

4. Maintain Accounts

Along with the previous tip, you should also keep your accounts open for as long as possible. This keeps your average account history higher, and therefore leads to a higher credit score.

5. Review Credit Reports

You are able to get your credit report for free once a year for each of the three credit reporting agencies: Experian, Equifax, and Transunion. By checking these reports, you can check for any discrepancies that may be negatively affecting your credit score.

Frequently Asked Questions (FAQ)

What does it mean to build credit?

Building credit involves creating a credit history that reflects your ability to responsibly manage and repay borrowed money. A good credit history can make it easier to qualify for loans, credit cards, and can often result in better interest rates.

Why is having good credit important?

Good credit is important because it influences your ability to secure loans, including mortgages and auto loans, obtain credit cards, rent an apartment, and sometimes even affects employment opportunities. It often determines your interest rates and credit terms.

How can I start building credit?

You can start building credit by:

  1. Applying for a secured credit card or a student credit card if you have limited or no credit history.
  2. Becoming an authorized user on a family member’s credit card.
  3. Using a co-signer when applying for a loan or credit card.
  4. Paying all your bills on time, including utility and cell phone bills.

What is a secured credit card?

A secured credit card is a type of credit card that requires a cash deposit, which typically becomes your credit limit. It’s designed for individuals with no credit history or those looking to rebuild credit.

How does paying bills on time affect credit?

Paying bills on time is crucial in building a good credit score, as payment history is a significant factor in credit scoring models. Late payments can negatively impact your credit score.

How long does it take to build a good credit score?

Building a good credit score can take several months to a few years. It depends on several factors, including your financial activities and the history of your credit accounts.

Is it necessary to carry a balance on credit cards to build credit?

No, it’s not necessary to carry a balance on credit cards to build credit. Paying off your balance in full each month can help you avoid interest charges and build good credit.

How many credit accounts should I have to build credit?

There isn’t a specific number of credit accounts you need to build credit. It’s more important to manage the accounts you have responsibly. Having a mix of different types of credit can positively impact your score.

Can student loans help in building credit?

Yes, student loans can help build credit. Timely repayment of student loans is reported to credit bureaus and contributes positively to your credit history.

What should I avoid when trying to build credit?

When building credit, avoid:

  1. Late payments on bills or loans.
  2. High credit utilization (try to keep it below 30% of your total credit limit).
  3. Applying for multiple credit accounts in a short period.
  4. Defaulting on loans.
  5. Closing old credit accounts that can shorten your credit history.
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