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How to build credit
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Fast Credit Repair Solutions editorial disclosure for more information.
Even for the most financially literate, it can be difficult to understand how to build credit the right way. It takes time to build a good credit score, but putting in the work now may open up better financial opportunities in the future.
Whether you need to establish a credit score from the ground up, are wondering how to improve your existing score or just need credit help, use this guide and insider knowledge of credit reporting agencies to lead you to your financial goals.
How to build credit with a credit card
If you check your credit score or credit history and don’t find any results, you are part of the one in 10 adults that are credit-invisible. Being one of the 26 million Americans who are credit-invisible makes it difficult to apply for most loans, leases and credit cards. However, not having a score doesn’t prevent you from establishing credit.
The first step in obtaining a credit score is to establish a credit lending history. If you’re starting out without any lending history or an insufficient credit history, there are various lending options for you. Although these choices don’t come with the perks and incentives that top credit cards have, they provide an opportunity to build credit quickly.
Below, we’ve outlined the steps to take when opening a credit card for the very first time.
Find an easy approval credit card
There are a number of credit cards that exist just for beginners and those looking to build their credit from the ground up. Here are the ones we recommend.
Secured credit cards
A secured credit card helps you build a credit history without any of the risks that come with borrowing a sum of money. A secured credit card will use a deposited sum of money to act as collateral for a line of credit, with most secured cards requiring at least a $200 deposit. Depending on the lender, there may be an additional annual fee.
It’s crucial to pay off any outstanding payments on time, because secured credit cards have a high purchase annual percentage rate (APR) for any amount overdue. It is highly recommended that you use a secured credit card as you would a debit card: Only make purchases when you know you have sufficient funds.
Student credit cards
Student credit cards are designed for college students over the age of 18. Student credit cards may require a minimum credit score in order to apply, but many of the requirements are designed with the average student in mind. With low APRs and competitive rewards programs, these cards can help build credit if you’re just starting out.
Store credit cards
Store credit cards are an option that many businesses offer to finance both in-store and general purchases. Store credit cards often have a low or no credit score requirement, making them a great option for someone starting out without credit. Store credit cards are best used for grocers and any other place where you shop frequently for necessities.
Consider a cosigner
A cosigner for a credit card acts as a responsible party, vouching that if any funds are due to the lender, they are accountable to pay the debt.
A cosigner can be used when applying for a credit card if you:
- Do not have sufficient funds to maintain credit card payments alone;
- Are under the age of 21; or
- Do not have a credit history.
Ask your parent or guardian if they are comfortable becoming your credit card cosigner.
Become an authorized user on someone else’s card
As an authorized user, your name will begin to show on the credit history for someone else’s credit card account. In turn, you will begin to build credit. Because an authorized user is not fully accountable to repay debts, it’s helpful to ask a parent or guardian if you can be listed as an authorized user. Becoming an authorized user will give you credit standing by being listed by the credit bureau, but you may not build sufficient history to aggregate a credit score.
How to build credit without a credit card
Credit cards may be the most common way to build credit, but they come with heavier responsibilities and repercussions of high APRs. As a credit score is calculated using your total lines of credit and lending history, there are other steps to take to build credit without using a credit card.
Take out a credit builder loan
Credit builder loans are designed specifically for new borrowers to help them establish a positive lending history. Banks, credit unions and self-lending companies offer small loans of around $1,000 as a way to establish credit.
When the loan is taken out you’ll be expected to pay it back over a period of six to 12 months. During the term of your loan, you will need to make payments on time in order to receive a positive credit score.
Negotiate a loan
Any loan will count toward your credit score, so if you’re planning on a large purchase or expense, you can negotiate a loan. If you’re starting without credit, a lender may ask you to either place collateral or get a loan cosigner.
Getting a cosigner is common for student and car loans as they are typically a hefty investment. Student loans may have a payback period of over 10 years and will begin to build credit when you start paying them off. Car loans have a shorter payback period and typically start to show on your credit score sooner. Keep in mind that you should make your payments on time and in full—this is the key to building a great credit score.
Report rent and utilities
Rent and utilities are not usually reported to credit agencies because landlords and leasing companies often don’t bother reporting this activity. However, timely rent and utility payments are an excellent opportunity to begin building credit without a credit card as they prove to lenders that you’re capable of making large monthly payments on time.
To begin reporting your monthly rent and utility payments, ask your landlord if they have an option to report your payments to credit agencies. If you live in a larger complex with a leasing company, see if they have a credit reporting option on your rent payment website and opt in to report payments each month.
How is a credit score calculated?
To best understand how to improve your credit score, it’s important to look at how your credit score is calculated. Your FICO score is calculated using data reported by the major credit reporting agencies and is used by lenders to determine risk and eligibility for lending.
The FICO score variables:
- Payment history
- Amounts owed
- Length of credit history
- Credit mix
- New credit accounts
Payment history
Payment history is the most important factor, and it carries a 35 percent weight in your overall credit score. It will have a positive effect on your credit score if you make your payments both on time and in full, but payment history will have a negative effect on your credit score if you carry over balances, make late payments or default on payments.
Amounts owed
How much debt you owe accounts for 30 percent of how your credit score is calculated, which consists of both good and bad debt. Good debt means you have allowances that you’re paying off over time.
Just because you have an outstanding debt doesn’t mean you will have a negative score. Amounts owed can reflect negatively on your credit score when you have large amounts of outstanding debt that you are not making the minimum payments on each month.
Length of credit history
How long you’ve been listed as a borrower accounts for 15 percent of your overall credit score. The length of your credit history adds credibility to your credit score for lenders, as it proves you are capable of paying timely payments.
A long, bad credit history will have a negative impact on your credit score, and this factor can end up significantly lowering your score.
Credit mix
Accounting for 10 percent of your overall score, credit mix is the diversity of your overall credit or lending history and accounts. Your credit mix is defined by the number of different types of credit you have outstanding and you have used in the past. Student loans, car loans, credit cards, mortgages and any other formal lending will add to this score.
New credit
Your new credit accounts make up 10 percent of your overall credit score and are weighed higher than your overall transactions. Many score-raising hacks, like taking out another credit card or loan, can cause your credit score to rise, but the benefits are short term. New credit transactions are constantly revolving and are updated in 30-day cycles.
Negative credit report entries consist of late payments, delinquencies, charge-offs, overdrafts and a variety of other negative lending practices. Another avenue to raising your credit score is through credit repair services that remove negative entries from your credit history.
How can you improve your credit score?
Once you’ve built up credit history, improving your credit can be a little more difficult. Your credit score is carefully calculated using metrics of your lending and payment history, transactions, types of credit and total amounts owed. Luckily, with careful planning and some budgeting best practices, you can bring your credit score up.
1. Pay off your credit more frequently
Paying off your credit more frequently than the required monthly payment can have a positive effect on your credit score, as it will keep your credit utilization low and help you stay ahead of large debts.
More frequent payments also means a higher number of total payments to influence your credit score. Paying your bills more frequently is a longer-term investment that will have a positive effect on your credit score in months rather than weeks.
2. Make credit card payments on time
Keeping up to date on your card payments has the most impact on improving your credit score over time. In fact, payment history is the heaviest weighted metric in your FICO score. If you struggle to make full payments, making the minimum payments will not negatively affect your credit score.
3. Repay any outstanding debts
Paying back any outstanding debts can have both a positive and a negative impact on your credit score. Credit companies incentivize sticking to your financial plan by positively influencing your credit score when you pay your debts back on schedule. Paying back debts either too early before or too late after the due date is a sign that the borrower should have taken out credit with a different timeline.
4. Keep unused credit cards open
Closing out old and unused credit cards isn’t ideal and could negatively affect your credit by raising your credit utilization and shortening your lending history. But if your credit card has any fees or minimum usages required, you should still close it.
5. Lower your credit utilization
Credit utilization is the amount of funds you usually borrow compared to your total credit limit. Your average credit utilization is a major factor of your credit score, as it determines whether you’re spending habits on the card are close to your total limit.
An ideal credit utilization is 30 percent or lower. It is important to keep your credit utilization low, as frequently hitting your limit will negatively affect your credit score.
6. Increase your credit limit
If you find yourself nearing your credit limit between each payment, you should ask your credit card provider to raise your limit. When you reach out to raise your credit limit, be sure to have first paid off any balances or bills due on the card.
Credit card companies will first look into your account before deciding to raise your credit limit and can deny a request if you have outstanding balances, frequently miss payments or frequently pay only the minimum balance.
7. Remove certain negative credit entries
Negative credit entries like hard inquiries, late payment charges, reporting mistakes and even delinquencies can all be removed from your credit report, given some stipulations. Removing a negative credit entry is one of the quickest ways to improve your credit score as updates are typically handled within 30 days.
To remove an inaccurate or unverified negative credit entry, you’ll need to submit a credit dispute letter outlining the discrepancies you found. This letter is then submitted to credit agencies, requesting that they either correct or remove the inaccuracy. If you prefer not to handle this process yourself, a credit repair company, like Fast Credit Repair Solutions, can potentially help you out.
Whether you’re a student just starting out on your credit journey or someone in need of credit repair, there are a number of options to help you build credit. From getting a cosigner to negotiating a loan, building credit may take time but will help set you up for financial success.
Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
While learning more about your credit is important, Fast Credit Repair Solutions is here to help you start working toward better credit. Call for a free consultation.
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