- Your credit score indicates to lenders how likely you are to repay a debt.
- Building your credit from scratch is usually easier and quicker than repairing damaged credit.
- Options for building your credit often come with higher interest rates.
Understanding credit
Your credit score helps creditors assess how likely you are to repay a debt. The higher your credit score, the less risk the creditor takes on when giving you a loan.
An excellent credit score qualifies you for the best interest rates on loans and the best credit cards. A high credit score can save you thousands of dollars when you make large purchases, such as a car or a house. "Ultimately having at least a decent credit score will save you money," says Shindy Chen, the founder and chief executive officer of Scribe.
Steps to build credit
The two main credit scoring algorithms, FICO and VantageScore, calculate your credit scores based on information on your credit reports. The information on these credit reports, compiled by the three major credit bureaus, pertains to credit accounts like loans, mortgages, or credit cards. The main factors that are considered are payment history, credit utilization ratio, and length of credit history.
However, the credit scoring algorithms need a certain amount of data to calculate a credit score. If you don't have enough payment history or you've never engaged with any credit products, it will be hard to build a credit score.
Credit builds off of itself, which makes it challenging to break into the system and make yourself visible to the credit bureaus. However, there are certain ways you can strategically build your credit.
Use a co-signer or become an authorized user
One of the easiest ways to build credit without a prior credit history or bad credit is to become an authorized user on a friend or family member's credit card. As an authorized user, you get a credit card under your name and credit history, but it's attached to the primary cardholder's account. So when the primary cardholder makes their payments, it also goes toward building your credit history.
Note: If the primary cardholder misses a payment, that delinquency will also negatively impact your credit score.
This is a popular way parents can help their children build credit. While you have to be 18 to qualify for your own card, most credit card companies allow you to become an authorized user as a minor. Some credit card companies don't have a minimum age requirement at all.
Once you turn 18, you may not have the required income to get approved for a credit card. In such a situation, a relative can become a co-signer on the credit card if they have enough credit. A co-signer is responsible for paying off your debt if you cannot. Co-signing also applies to loans.
Use a secured credit card
Secured credit cards are credit cards with a line of credit backed by a security deposit you make when you first open the card. This deposit will also be the line of credit you borrow against, anywhere between $50 to $5,000, though most card deposit ranges will stay within $200 to $2,500. You will get this security deposit back, so making a larger deposit may be worth it so you can spend more without throwing off your debt-to-credit ratio.
Many credit card companies that offer secured credit cards also offer a graduation program at a certain point — as early as six months into the account's life — if you use your card responsibly. At that point, you will get your deposit back and your card functions like a traditional credit card.
Use a student credit card
Student credit cards operate like traditional credit cards in that they're unsecured, so they aren't backed by a deposit. The required credit scores for a student card aren't terribly high, so they come with higher interest rates and lower credit limits than traditional credit cards. However, the best student credit cards still come with some perks and rewards.
To get a student credit card, most credit card companies require that you provide proof of enrollment, though a handful only require you to meet a certain income level. If you lack a reliable source of income, student credit cards also accept co-signers.
Apply for a credit-builder loan
Typically, the money you borrow through a loan is given to you upfront, and you pay it back in increments. But a credit builder loan works in reverse. Here, creditors withhold the amount of money you're "borrowing" — usually $1,000 or less over 12 to 24 months — until you pay it off. As you make payments, the loan provider reports to the credit bureaus. Once you've made all your payments, you get your money back.
At a glance, this operates like a savings account, and many loan providers advertise their products as such. However, this loan is still subject to interest, so you will pay the creditor a portion of those savings. Nevertheless, this can be another possible option to lengthen your credit history.
Check out our picks for the best credit-builder loans.
Take out a secured loan
Similar to a secured credit card, secured loans are backed by collateral. The amount of credit you can access depends on the value of whatever you put up for collateral, such as a car or your house. If you default on your loan, the creditor possesses whatever you put up as collateral. Because your loan is secured, it's less risky for the creditor. This means these loans can accept people with lower credit scores while offering a lower annual percentage rate.
Sign up for rent (and utilities) reporting
By default, only payments on your credit accounts count toward your credit scores. However, this only represents a fraction of your expenditures. Monthly payments like rent or utilities aren't reported to credit bureaus unless you regularly miss your payments, which will lower your credit score.
However, an increasing number of services will report these payments to the credit bureaus, which will help you build out your payment history. Third-party services like rent reporting companies will add your rent onto your credit reports for a fee. The best rent reporting companies can also retroactively add previous payments on past leases and offer additional payment reporting services.
Reported rent will not affect FICO 8 credit scores, one of the most widely used scoring models. However, it will affect your FICO 9 and VantageScore 3.0 scores.
Aside from third-party services, even the credit bureaus are dipping their toes into alternative payment reporting. Experian, one of the three credit bureaus, offers a service called Experian Boost, which allows you to add your utilities, phone bill, cable, and charges for monthly streaming services to your Experian credit history. These will only affect your credit scores derived from your Experian credit report.
Consider buy now, pay later services
More recently, the buy now, pay later (BNPL) model can also add to your credit history, depending on the type of service that you use. Yet another avenue for building credit, Chen warns that the risks are the same with all types of borrowing. If you lose track of your payments, it could hurt your credit. "For people who are trying to manage their budgets, every time you sign up for one of those services, you're adding to your monthly payments," she says.
Managing credit responsibly
Pay bills on time
Payment history makes up 40% of the calculation for your credit score. The most important thing you can do to build and maintain good credit is to pay your bills on time every month.
Keep credit card balances low
The next important part of your credit score is your credit utilization ratio. Your credit utilization is the amount of available credit you are using at any given time. It is recommended to keep your credit utilization at 30% or less. For example, if you have a credit card with a $1,000 limit, your reported credit card balance shouldn't exceed $300. If you are constantly carrying a balance or your utilization stays above 30%, this can signal to potential lenders that you are dependent on credit and that you take too long to pay your creditors back.
Avoid unnecessary credit inquiries
A hard credit inquiry is generated whenever you apply for credit. The problem occurs when you apply for too much credit. If a potential lender pulls your credit report and there are several inquiries, it may look like you are applying for credit due to financial distress and if they can look at the inquiry and not see a corresponding credit account, it shows that other lenders have viewed you as a risk and denied your credit application.
Monitor your credit regularly
Monitoring your credit report can help you stay aware of financial changes that may affect your credit score. Knowing your credit score, utilization, and overall financial picture can also help you make financial decisions, such as applying for a loan, credit card, or car loan, and improve your credit score.
By monitoring your credit report, you can catch suspicious activity or possible fraud before it's too late. You can also dispute mistakes, such as incorrect information reported to your credit report. You can get a free credit report from all three credit bureaus every year from AnnualCreditReport.com.
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Frequently asked questions about credit building
Building credit from scratch can take 3-6 months to see initial results, but if you've damaged your credit score by defaulting on a loan or missing a payment, that will continue to negatively affect your credit score for seven years before it falls off your credit report.
If you already have a credit score, the best way to build a good credit score is to make your payments on time consistently, keep your credit balances low, and be patient. You can try opening other lines of credit, but too many hard inquiries incurred on your credit report at once will seriously dent your credit score.
Yes, paying rent can build credit. There are rent reporting services that report rent payments to credit bureaus, increasing positive payment history, which can help build your credit.
Yes, you can build credit without a credit card by opening a credit-builder loan, becoming an authorized user, enlisting a co-signer, and other methods.
