How to Build Credit

6 ways to build credit

When you’re starting from scratch, building credit is not as easy as opening a new credit card and using it responsibly. Here are some tips to help you get started with building credit:

1. Become an authorized user

The easiest way to start building your credit is to be added as an authorized user to someone else’s credit card, which will help you to establish and build your credit history. Ideally, this person should be financially responsible, meaning they should pay their bills on time and practice good credit habits. Their card should also be a well-established card that reports authorized user activity to the credit bureaus.

As an authorized user, you can get a credit card with your name on it, which you can then use to make purchases. However, you don’t need to have access to the card to benefit, so a parent or grandparent can add you and never give you your own card.

2. Apply for a secured credit card

Another easy way to start building credit is to open a secured credit card. A secured credit card is similar to a standard credit card, except that you’ll need to put down a cash deposit to get it. The deposit is generally the same amount as your credit limit, and you’ll get it back in full when you close the account, provided you made your payments on time.

By requiring a deposit, issuers can provide credit to individuals who have little to no credit history. Many credit card companies that offer secured credit cards will offer you the opportunity to move to an unsecured credit card once you make enough on-time payments and improve your credit score.

3. Use a rent-reporting service

Generally, monthly rental payments aren’t reported to the credit bureaus. However, you can utilize a rent-reporting service to get your payments reported. Some services to consider include:

• Rental Kharma
• RentTrack
• Boom
• Self

4. Take out a credit-builder loan

A credit-builder loan is different from a traditional loan or line of credit. Instead of paying a creditor back what you borrowed, you’ll typically make regular payments to a savings account. The bank or credit union will report your payments to the credit bureaus, and at the end of the payment term, you’ll get your funds back. Note that these loans often have interest and fees.

» MORE: Best Credit-Builder Loans

5. Get a co-signer

Most major creditors don’t allow co-signers for credit cards, but you can generally get one on an auto loan or personal loan. This is a viable option if you’re in the market for a car loan or personal loan but don’t qualify based on your credit score or income.

Note that it is a risk for your co-signer to agree. If you forgo your payments, your co-signer is responsible for making payments, and their credit will take a hit.

6. Apply for a student credit card

If you’re currently a college student, you could be eligible for an unsecured student credit card. Depending on the credit card company, these student cards often don’t have annual fees or credit score requirements, and you may even earn rewards or cash back. Note that, to qualify, you’ll typically need to prove that you’re currently enrolled at a university.

Best habits to improve your credit score

Some helpful habits to build your credit include:

Pay bills on time and in full

One of the best ways to improve your credit score is to pay your bills on time.

“A big opportunity for improving your credit is making on-time payments and not missing any payments,” said Kendall Meade, a certified financial planner (CFP) at Domain Money.

“Payment history is generally the largest factor in determining your credit score and anything less than 100% of bills paid on time and in full will bring your score down,” Meade said. “It is best to set up autopay, so your bills are paid on time and in full each month to avoid any issues with payment history.”

Keep your credit utilization low

Just because you can spend up to $1,000 on your credit card doesn’t mean you should max it out each month. In fact, doing so will increase your credit utilization ratio, which is the amount of credit you’re using in relation to your available credit limit. If you use too much of your available credit, your score will drop.

Generally, it’s recommended to keep your credit utilization below 30%. So if your credit limit is $1,000, don’t spend more than $300.

Be mindful of your accounts

It’s best to keep your oldest credit account open to establish a longer credit history, which is a factor of your credit score. If you close your oldest account, the length of your credit history will go down to however long your second-oldest account has been open.

It’s also best to not open too many accounts at once as this will cause a slight dip in your credit score. This behavior can also look risky to lenders, so they might be less likely to lend you credit or a loan in the future.

» MORE: What Is a Good Credit Score?

FAQ

Bottom line

Initially, you won’t get the best credit card offers or loan rates when your credit history is still new. However, if you keep up good credit habits, you can eventually replace secured credit cards with better rewards cards and build a strong credit history within a few years.