Looking for ways to build your credit history? Having good credit can make it easier to get the things you need as you go through life.
Credit cards, a new car, a mortgage, and even a new job can be easier to secure when you have good credit.
It’s one of the most important factors lenders consider when you’re looking to borrow money. Whether you’re rebuilding credit or starting from scratch, we’ll show you some simple strategies you can use to build yours.
How to build your credit history: Things to know when you start out
Before they’ll extend you new credit, lenders will dig up your credit history to figure out the likelihood that you’ll pay them back. It’s standard practice and part of their credit underwriting process.
To get the information they need, they’ll rely on reports from the three major credit reporting agencies: Experian, TransUnion and Equifax. These credit reporting agencies, also known as credit bureaus, are in the information-collection business. They gather your credit history and then assemble it into files used to calculate your credit score.
FICO and VantageScore
FICO provides the most popular credit scores and are used by 90% of the top auto, mortgage and credit card lenders. You’ll want to keep track of your FICO score, and monitor its improvement.
VantageScore also provides credit scores and competes with FICO. While both companies use 300 to 850 as their scoring range, the number you get from each will be slightly different.
You can find several free sources of credit scores that will provide you with either a VantageScore or a FICO score.
Credit scores are calculated using various pieces of information from your credit reports. Each data point is grouped into five main categories that include your:
- Payment history
- Amounts owed / Credit utilization rate
- Length of credit history
- Credit mix
- New credit
The most important factor in the list above is your payment history, followed by your utilization rate. Items like your on-time payment record, and whether you have any missed payments are part of your payment history.
Building good credit takes time, so the sooner you can start, the better. When you start building credit from scratch, some of the factors mentioned above won’t play as big of a role initially. The length of your credit history, for example, will carry less weight as you start building credit.
» Further reading: A Beginner’s Guide to Understanding Credit Scores.
Using credit cards to build credit
Credit cards are convenient financial tools that can help you build credit when used responsibly. With credit cards, you don’t need to carry a balance at all in order to build credit. What’s important is that you make your monthly payments on time and that you keep your balance as low as possible. Here are some ways to build credit using credit cards.
Apply for a credit card
If you’ve never opened a credit card account, but are carrying debt—like a student loan, you likely already have some credit history. This can make it easier to get approved for a regular credit card.
After you get your first credit card, the card’s issuer will report your payment behavior to the major credit bureaus, helping you build your credit. Start by making small charges on you card and pay off your balance in full each month.
Once you get your credit card, you may need to go through one full billing cycle before the card issuer reports any information to the credit bureaus. But then, in as little as three months of good credit behavior, you’ll start seeing improvement in your credit score.
If you decide to get a credit card, spend some time researching your options and then apply for one. Applying for multiple cards within a short period of time is not a good idea as it will hurt your credit score.
Using a secured card to build credit
If you haven’t established any credit history or are looking to rebuild poor credit, consider a secured credit card. A secured card is different from a regular credit card in that you’ll need to make a deposit as collateral to back up your credit line.
With some exceptions, your maximum credit line will be equal to your security deposit. For example, if you deposit $300, your credit limit will be at most $300 or a percentage of it, depending on your card issuer and any fees related to opening the account.
You’ll start building your credit history by charging moderate amounts and making your payments on time. Ideally, you’ll want to pay off your entire balance each month. If you can’t, keep it as low as possible and pay more than your minimum due.
How do secured cards work?
Secured credit cards are regular credit cards, but they require a minimum security deposit. This deposit is held as collateral for the account, meaning that you pledge it as security for repayment. If later, you decide to close your account, you’ll get your deposit back, assuming you’ve paid your balance in full.
After you apply and get approved, you’ll need to make your required deposit to open your account and get your initial credit line. You can easily fund this deposit using your bank account. If you don’t have one, you can compare different savings accounts with this tool. Once you make your security deposit, you should receive your card in two to three weeks.
To build your credit history, you’ll want to choose a card that reports your account status regularly to the credit bureaus. These recommended secured cards report to the three major credit reporting agencies.
What’s a secured card good for?
Secured credit cards provide a simple way to build your credit from scratch or rebuild from a low credit score. And they’re easier to get approved for than regular credit cards. Here are some of the things a secured card is good for:
» Show that you can manage debt: By making your payments on time, you demonstrate that you can manage this type of debt, which is positive for your credit score.
» Diversify your credit mix: A secured credit card also helps in diversifying your credit mix, which refers to the types of debt accounts you have. A diversified mix can have a positive impact on your credit score when it reflects your ability to manage various types of credit responsibly.
» Get regular credit card benefits: Secured cards offer some of the benefits provided by regular credit cards like convenience and fraud protection. Similar to regular cards, secured credit cards provide a convenient form of payment and afford you with purchasing power at a moment’s notice. Also, federal law tops out your liability for unauthorized charges of your card if you lose it or it’s stolen.
In addition to these benefits, some secured cards may also come with other perks such as points, no annual fee, or even an introductory APR offer on purchases. So it’s worthwhile comparing secured credit cards before you get one.
Can store cards help you build credit?
Yes they can, and you can get approved for one even if your credit score is weak, but your credit limit may be lower than that of a regular credit card.
To build credit with a store card, you’ll need to use it responsibly, just like any other credit card, and keep your balance low. In general, “low” means less than 30% of your credit limit.
Low credit utilization has a positive impact on your credit score because it shows that you aren’t stretched too thin and have available credit. So if you get a store card, and you don’t use it, its credit limit will boost your credit availability and lower your credit utilization, which can help your credit.
Another disadvantage of store cards is that you may only use your card to make purchases with the retailer that issued it to you. Not only will you be tied to them, but they’ll likely bombard you with offers to spend money and go into debt.
Nevertheless, if you use your store card responsibly or only get one to lower your credit utilization, it can help you build credit.
Prepaid cards won’t help you build credit
Even if it comes with a Visa or Mastercard logo printed on it, a prepaid card is not an actual credit card. The card issuer won’t report the card’s status to any credit bureaus, which means that you won’t be building credit with it.
Something to dislike about prepaid cards is their fees. They can come with a very long list of fees including monthly fees, transaction fees, cash reload fees, balance inquiry fees, ATM withdrawal fees,…you get the point. If you need the convenience of a debit card, consider opening a checking account instead.
Get help from a cosigner to get a credit card
If you have a family member or friend with good credit, they can act as cosigner to help you apply for a regular credit card and help you build your credit history. This isn’t a light responsibility they’ll be taking on, though, since they’ll be on the hook for your debt if you fail to pay.
When you apply, the credit card issuer will look past your credit score, even if it’s weak, and use the good credit profile of your cosigner instead. You’ll be the primary card holder and will be responsible for paying on time. Should you fail to do so, your cosigner will be responsible for repayment.
While most major card issuers don’t allow credit card cosigners, a handful still do. Bank of America, U.S. Bank and Wells Fargo are some of the names that still allow a cosigner. Getting a cosigner will help you build your credit history, but don’t expect a large uptick in your credit score.
You’ll also see a moderate positive impact on your credit score if you become an authorized user of a family member’s credit card. Their account will need to be in good standing before they can add you as a user.
As an authorized user, you’ll get a card in your own name and you’ll be able to use it to make purchases, though you won’t be responsible for the account. The card number you receive will be the same one of the primary card holder.
The process to become an authorized user is straightforward. Your family member will need to follow some simple steps:
- Log in to the card account
- Identify and click on the link to add an authorized user
- Fill out and submit the relevant online form
Once you get your card and start using it, you won’t get an account statement. Your family member will be responsible for your card’s activity and will have to pay for all the charges you make.
Using loans to build credit
Installment loans are another financial tool at your disposal to help you build your credit history when used sensibly. If you need the money, only borrow the amount you need and use a cosigner to help you qualify. If you don’t need the money, consider a credit builder loan. Below you’ll find additional detail on these alternatives.
Establish good credit with a credit builder loan
Credit builder loans or savings secured loans are another way to build credit. They can be a good alternative if you’re a first-time borrower, have weak credit or no credit. Check with your local financial institutions including credit unions and community banks to find a credit builder loan that’s right for you.
Here are some of the common features of credit builder loans:
- You borrow a small amount for a short term
- The proceeds go into a restricted savings account
- You’ll make monthly payments, just like a regular loan
- The loan’s APR is typically low
Loan amounts can be in the range of a few hundred dollars to a couple thousand dollars with terms from 6 months to up to 3 years, depending on the institution, your goals and your budget.
As you make your monthly payments, your financial institution will report your activity to the credit bureaus, helping your build your credit history.
Once you pay off the loan, the savings account becomes unrestricted, your credit will have improved, and you’ll have a stash of money that you can save, use it to pay down debt or put it to work for you in a certificate of deposit account.
Get help from a cosigner to get an installment loan
Taking out a small personal loan can help you build your credit history as you make your timely monthly payments. If your credit isn’t on solid ground yet, you’ll need a cosigner to qualify for one.
Your cosigner can be a family member, a friend, or any person who agrees to share responsibility of paying back the loan. While having a cosigner who has good credit won’t guarantee that you’ll get the loan, it’ll improve the likelihood that you get approved.
To qualify for a loan, your cosigner will need to:
- Demonstrate they earn sufficient income to meet the loan’s obligations
- Have a moderate debt-to-income ratio
- Have a good credit score
As part of the approval process, lenders will eventually do a hard credit pull on your cosigner’s credit profile, which will have a temporary effect on their credit score.
» Related: You can compare personal loans quickly with this tool.
Regardless of the type of account you choose to build credit, the important thing to remember is to make all your payments on time. Your payment history is the most important factor that goes into calculating your credit score, so stay on top of all your payments.
Building a healthy credit score can take time, but it’s worth it. And having good credit will make it easier to achieve your financial goals.
» Further reading: 19 Ways to Improve Your Credit Score.