The best ways to build credit

Having good credit is a key part of building a stable foundation for yourself financially. A good score can open the door to more lending opportunities and better interest rates. If you’re looking to build credit for the first time or repair your poor credit, there are strategies you can use to boost your score.

In this guide, we’ll break down some of the key factors that move your credit score and discuss things you can do to improve your credit.

The importance of building credit

Maintaining good credit is critical to maintaining good financial health. If you’re lacking a well-established credit history, have never taken out a credit card or loan before, or have missed payments and failed to comply with repayment schedules in the past, then your credit may look limited.

Those who have yet to build credit, or have a lower credit score, may find themselves being denied loans or credit cards outright, or may be subject to less favorable terms and rates to pick from. Many apartment buildings, home mortgage providers, and landlords may look to your credit score when determining whether they’re comfortable allowing you to rent or purchase a home.

With this in mind, you may be wondering about the best way to begin building credit history – and establish credit with or without a credit card – especially if you have yet to get started. The simple answer is to kick-start the process as early as possible. Building and improving your credit history takes time, making it doubly important to begin firming it up long before you need access to borrowed funds.

Credit reports and credit scores: How credit reporting works

When you get a loan or credit card, your lender will report details of the loan or credit use, including payment history, how much you owe, and when you applied for it, to one or more of the major credit bureaus - Equifax^®, Experian™ and TransUnion^®. These credit bureaus compile a credit report based on the information they receive about you, allowing lenders who look at the report to get a snapshot of your interactions with debt.

Lenders use that snapshot to decide if you’re a safe borrower. For example, a lender who sees someone with a strong payment history is more likely to offer them a loan than someone who has a history of missed payments.

Having a good credit score can offer many benefits, including:

• Having access to a greater number of credit cards and loans
• Enjoying more favorable borrowing and lending terms
• Being able to make large purchases, including property and homes
• More easily obtaining equipment, rentals, and services
• Being able to open lines of credit to draw upon as a safety net

What you may find on your credit report

A credit report will generally contain personal information such as your name, birth date, Social Security number, previous addresses, and prior employers. It will have a list of open credit accounts, each including the financial institution that has lent you the money, how much you owe them, your credit limit, the total amount of the loan, etc.

You’ll also find information on historical and closed credit accounts, including any missing/late payments or discrepancies, and whether you parted ways with providers in good standing.

You may find other information in your credit report as well: public and court records, recent inquiries you made when applying for credit or financing, and queries made by other companies (e.g., potential credit card providers who’ve referenced the report), for example.

If you notice errors or discrepancies on a credit report, be sure to contact the credit bureau in question immediately to report inaccurate information. Doing so can help you improve your credit, as can paying down large balances and bringing any delinquent accounts current.

Understanding your credit score

Your credit score can be thought of as a summary of your credit report. It’s presented in the form of a number, typically falling between 350 and 850, with a credit score above 700 generally considered good, and above 800 exceptional.

Credit scores are used by lenders such as banks, credit card companies, and even car dealerships to predict how likely you are to repay borrowed money.

Financial institutions will also use them to make decisions about whether to extend you credit, and if so, what the terms of any offer (including down payments, interest rates, special discounts or promotions, etc.) will be.

While credit reporting agencies and scoring models exist, there are elements that can impact your credit score in all of them. These include:

• Payment histories
• Credit utilization ratios
• Balances and total debts
• Credit types used
• Number of accounts
• Length of credit history
• Public and court records
• Prior bankruptcies and judgments

How to build credit with a credit card

Credit cards issued by banks, lenders, and other entities give you access to a line of credit that you can use to make purchases that you pay off later. Each month, you get a bill that outlines the balance of the card and the minimum payment you must make. If you don’t pay the balance in full, interest begins to accrue.

Use these steps to build credit using credit cards.

1. Apply for a credit card

One of the best ways to build credit using a credit card is to open one yourself. It’s the first step for many people looking to improve their score.

These are a few of the types of entry-level cards that most people can get with minimal credit history.

Student credit cards

These cards help students and younger cardholders establish a credit history and often come with special promotional offers, discounts, and rewards attached. While student credit cards frequently have extra account restrictions, such as lowered credit limits and higher interest rates, they’re a well-established and popular starting point from which millions each year begin building their credit history.

Secured credit cards

When you open a secured credit card, you make a cash deposit with the lender offering the card. That deposit becomes your credit limit. For example, you might make a deposit of $300 to get a card with a $300 credit limit.

This all but eliminates the lender’s risk, meaning almost anyone can qualify for a secured card that they can use to build credit by making timely payments. You can use the card just like any other credit card. With good behavior, your credit will improve, and the lender may refund your deposit. You can also get the deposit by closing the card.

Store credit cards

Many major retailers issue store-branded credit cards, and some may also be willing to give them to people with limited to no credit as a chance to borrow money and establish a credit history. While these cards often come with high interest rates attached, if you maintain a monthly balance, they may also provide access to special discounts on purchases and offers at the stores where you most often shop.

Traditional credit cards

Of course, if you’ve already established a credit history of some kind, many credit cards will likely be competing for your business, including some with low spending limits that may come with less stringent credit requirements.

You can continue to build out your credit by registering for one, making small charges, and paying off your balance in full each month. Doing so offers a handy opportunity to demonstrate patterns of responsible credit card use and payment and establish a successful credit history faster.

2. Become an authorized user on someone else’s card or open a joint account

Many credit cards allow the cardholder to add other people to the account as authorized users. This gives them a card of their own to use and allows them to make charges to the primary cardholder’s account.

Some lenders will report the details of a credit card to both the primary cardholder’s credit report and the credit reports of any authorized users. This can mean that becoming an authorized user on someone else’s credit card could help you build credit, so long as that person pays their bills on time.

Keep in mind that you’re asking the primary cardholder to trust you not to misuse the card, so be sure to be responsible.

This is also a popular strategy for couples or parents with children who want to help their partner or child improve their credit scores.

Opening a joint account, like a joint personal loan, works much the same way. However, with joint accounts, both people named on the account are legally responsible for the debt, while with credit cards, only the primary cardholder is responsible.

3. Request an increase to your existing card’s credit limit

Also worth keeping in mind: If you are a well-established credit card user with credit that is in good standing, another way to help build out your credit faster is to request an increase in your credit limit from your financial provider.

Credit reporting companies often look at how much credit is available to you compared to how much you’re actually using when determining your credit score. In effect, if you can increase the amount of money you’re eligible to borrow in total while keeping your credit utilization ratio low, your credit score will be better for it.

To maximize your credit score, whenever possible, you’ll want to keep this credit utilization ratio (the percentage of your overall credit limit that you’re using) below 30% at all times.

How to build credit without a credit card

You don’t necessarily need a credit card to build credit. You can also consider these options.

Paying your student loans

Student loans, like any other type of loan, are included in your credit report. That means that every on-time payment shows up on your report and improves your score. On the other hand, late and missed payments can damage your score, so be sure to handle your student debt properly.

Applying for automobile loans 

Getting an auto loan and buying a car is another way to get a loan that appears on your credit report. That gives you the opportunity to make timely payments and build your payment history.

As a bonus, auto loans can add to your credit mix, another factor that influences your score.

Becoming a homeowner

If you buy a home and get a mortgage, that loan will also appear on your credit report. Mortgages add to your credit mix and give you the opportunity to build a good payment history, so long as you can handle the payments.

Paying rent and utility bills in a timely fashion

In select cases, you may also establish credit by making regular rent payments and paying off your utility bills. However, not all landlords and utility providers report your payment history to credit bureaus unless you’ve been delinquent with payment and a collection agency or lawsuit is used to recover the funds.

If your landlord or provider does not report positive and responsible payment activity, you have two options: ask your landlord or utility provider to submit a positive payment history to a credit bureau that tracks it, or employ an external service (an online search will quickly reveal several) that can help you surface this information.

Considering secured loans

Like secured credit cards, secured loans require collateral – something of value that can serve as security for the loan. Common examples include cars, Certificates of Deposit (CDs), or investment accounts.

Collateral lowers the lender’s risk, making these loans easier to get than unsecured loans. If you get one, you have the chance to build credit by making timely payments. Be sure to check with the lender to confirm how the loan gets reported to the credit bureaus.

Applying for personal loans

Personal loans are another type of loan that gives you the chance to build credit by making timely payments. These loans are flexible and usually unsecured, so they typically require fair credit and may have higher rates than secured debt, but they’re useful for things like consolidating debt or handling unexpected expenses.

Before applying, be sure to shop around to find the best lender and rates.

Investigating nonprofit lenders

Many nonprofit lenders and charitable organizations now offer low-income borrowers across the nation a ready-made way to obtain funds and financing as they work to build a positive credit history.

These institutions not only provide access to cost-affordable loans designed to help those with limited resources, but like many other lenders, they also report payments to the credit bureaus, and so can help you build out a more comprehensive payment history.

Establishing your credit with no credit history

Building credit can be something of a chicken-and-egg problem. With no credit, it can be hard to get a loan, but you need a loan to build credit. You may need to start with an entry-level option like a student credit card or secured loan.

Keep in mind that it can take time, meaning several years, to build excellent credit. You also need to be consistent about making timely payments and avoiding overborrowing. Even one missed payment can have a big, negative impact on your credit.

Also consider opening a joint account or becoming an authorized user on the account of someone with good credit. That could give you a jump start toward having a good credit score.

How to get an 800 credit score

It’s normal to set a goal for what you want your credit score to be. Credit scores usually range from 300 to 850, and some aim to get a score over 800. That’s an excellent score to have, but it can take years to get there.

If you decide to shoot for a high score, use these tips.

1. Make all your account payments on time

The number one factor impacting your credit score is your payment history. That means you need to pay all your bills, including loan bills, utilities, and even medical bills, on time. Even one missed payment or account sent to collections can cause your score to drop a significant amount.

2. Keep your overall credit utilization low

Your credit utilization is the percentage of your revolving credit limits that you’re currently using. To maintain a good score, avoid overborrowing and aim to keep your utilization below 30% of your total credit limits.

3. Don’t apply for multiple credit cards, loans, or accounts in rapid succession

Each time you apply for a new credit card or loan, lenders will check your credit score. That hard pull on your credit can drop your score by a few points. Opening new accounts also reduces the average age of your credit accounts, which lowers your score.

To keep your score healthy, try to space out applications for new cards or loans, only applying when necessary and keeping it to one application every few months.

4. Securely maintain open credit card accounts

The longer accounts stay open (even if unused), the more positively they impact your credit history. Likewise, closing an account can impact your overall credit utilization.

However, as you maintain open accounts, it’s important to keep a close eye on them and stay alert for fraudulent activity. Open accounts can present a ready target for cybercriminals.

The bottom line: There are many strategies for building credit

Building credit is an important part of securing a solid financial future. Without good credit, you may struggle to borrow money at good rates, delaying things like buying a home or a new car. Use strategies like applying for entry-level credit cards or secured loans so you can start building your credit or become an authorized user on someone else’s account. Then, make sure to make every monthly payment before its due date. With time, your score should rise.

Make sure you have a good reason for borrowing money, and before applying for any loan, make sure to read the fine print so you fully understand things like the loan’s interest rate, term, and payment requirements. Taking the time to shop around for a good deal can help you save money on your next loan. If you’d like to learn more about your personal loan options, you can reach out to Rocket Loans.