How to Build Credit (The Right Way): A Complete Beginner’s Guide

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Updated: 1st Sep 2021
Written by Kim Pinnelli
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December 3, 2020
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Building credit is one of the most important financial skills for adults to learn. Unfortunately, many young adults don’t know the first thing about how to build credit, especially the right way.

A Complete Guide to building credit responsibly.

This guide will break down everything you need to know about building credit quickly but responsibly, plus point out some common pitfalls to avoid, so your credit score stays strong over the long-term.

Let’s get started!

How to Build Credit (for Real)

There are lots of different ways you can build credit fast. Let’s break them down one by one.

#1. Apply for a Credit Card

To start, you won’t be able to build any credit unless you have credit accounts with the three major bureaus: Experian, Equifax, and TransUnion. The best way by far to start building credit is to apply for a credit card.

Credit cards are like debit cards in that you can use them to pay for items. But instead of paying for items or services with your own money, you pay for credit stored on the card.

Credit cards have absolute limits that you can’t go above, and you have to pay a monthly amount off the card to continue using it without taking hits to your credit.

There are three main types of credit cards that are particularly good for building credit.

  • Secure Credit Card – Secured credit cards are ideal if you have no credit or poor credit. These are like regular “unsecured credit cards”, but they’re backed with cash deposits upfront that act as your line of credit. This allows you to build credit and still use the money you have saved up over time.
  • Student Credit Card – Student credit cards are just regular credit cards handed out to students with lower caps and low-interest rates. They’re ideal beginner credit cards since they’re perfect for students who don’t have a lot of experience using credit cards or who don’t have a credit history to speak of.
  • Retail Credit Card – Retail credit cards are special credit cards that are easy to apply for and get, even with poor credit. But you can only use them at the retail stores they are associated with. They are good options if you like to shop at vendors more frequently than others.

Maintain a Low Credit Card Balance

Regardless of the type of credit card you choose, you must maintain a low balance. Don’t max out your credit card every month and then pay it off.

Instead, it’s a better idea to only use your credit card a little bit every month and pay off the entire balance before the due date.

This will steadily build credit over time and establish your financial reputation as a trustworthy borrower.

#2. Become an Authorized User

You can alternatively build credit by becoming an authorized user, especially if you have no or bad credit.

In a nutshell, becoming an authorized user involves having a creditworthy friend or family member. Then they add you to one of their credit card accounts as an authorized user. This allows you to build credit using someone else’s account.

Be sure to check that the credit accounts in question report to the three big credit bureaus mentioned above.

This will ensure that you build credit over time and can help you build up enough of a score that you can apply for your own credit card later down the road.

#3. Apply for a Credit Builder Loan

There are also specialized loans designed specifically to help people build credit. These so-called credit builder loans (also called secure loans) are there to help you establish credit.

The loans work by stashing a certain amount of money away in an account. Then you pay off the loan over time. Each on-time payment you make gets reported to the credit bureaus to build up your credit score from scratch.

You don’t get access to the loan money until you fully pay it off. But this can be a great way to build up a nest egg over time, as the money is eventually transferred to a savings account and you can use it as you please once you pay the loan off entirely.

Will My Student Loans Help Me Build Credit from Scratch?

Yes. Student loans are just another type of installment loan (any kind of loan that you pay off with regular payments over a certain period).

Your student loans add new accounts to your credit reports and get your credit history started.

But student loans don’t help you build credit until you start paying them off. Once you do so, if you manage to make payments on time and in the right amount, you’ll steadily build up an excellent credit history.

#4. Use a Co-Signer

If you want to take out a loan to start building credit but don’t have enough credit (for good enough credit) to get a loan approved, you can use a creditworthy co-signer to get a loan approved instead.

A creditworthy co-signer can be anyone who agrees to take on the financial liability for the loan and any applicable debt. This can be a friend or family member.

Co-signers are pretty common for students and young adults that may not have credit histories to speak of. You can also use creditworthy co-signers to secure loans with lower interest rates than you would otherwise have to deal with.

#5. Get Credit for the Bills You Pay

You may be able to build your credit over time by paying your bills promptly. This isn’t a universal fact – only some credit bureaus take your rent and other bill payments into account while others ignore these.

Furthermore, only some bill services will report your monthly rent payments to credit bureaus, such as Rental Kharma and RentTrack.

However, this can be a little intensive, as you’ll need to have your landlord verify every payment and the above services charge you a monthly fee in most cases.

Alternatively, you can use services like Experian Boost to have your minor bill payments (such as for your utilities or cell phone) to the credit bureaus.

Some of these services or benefits only apply to one of the three big bureaus, but it’s still better than nothing.

  • Experian Boost – Counts your utility and cell phone bills toward your Experian credit report
  • Level Credit – Level Credit applies a bill that you pay and reports it to your credit report
  • Rental Karma – Also takes bills you pay and reports them to your credit report
  • UltraFico – Takes information from your savings, checking, and other accounts to potentially bolster your credit score

#6. Monitor Your Credit

Regardless of the exact methods you use to build your credit up, you should always keep this tip in mind as well: monitor your credit frequently.

By keeping an eye on your credit score, you’ll be able to note any sudden dips or drops and take immediate action to repair your credit score if there’s an error reported anywhere.

Monitoring your credit will also help you see how your score increases with time, keeping you motivated to pay your bills regularly and promptly.

How to get a Good Credit Score.

It may be a good idea to sign up with one of the best credit monitoring services. These services can automatically alert you if one or all three of your credit reports show signs of identity theft or suspicious credit score activity.

They can also give you advice regarding how to repair your credit score if an error is detected (for instance, if a credit card accidentally reports a late payment when you made it on time).

#7. Never Miss a Monthly Payment

Similarly, you should never ever miss any monthly payments for your credit cards. In fact, it’s a much better idea to pay your credit card bills before their due dates to make sure that the credit card companies get your payment on time, even accounting for delays.

Missing monthly payments is the number one-way credit scores get lowered over time, but this issue is entirely preventable if you keep track of your due dates.

Remember that you only need to make a minimum monthly payment to avoid getting a hit on your credit score. However, it’s smarter to make more than the minimum payment to avoid paying extra over the long run.

#8. Keep Your Credit Utilization Low

Try not to max out your credit cards every month. Credit utilization is essentially the rate at which you use credit for everyday purchases and expenses. Credit card companies and credit bureaus want to see people using credit responsibly, which usually means sparingly.

To that end, try to save using your credit card for significant or rare purchases, then immediately paying the credit off over the next week.

This means you keep your credit card as a backup option instead of relying on it as another source of income or cash.

A good rule of thumb is to keep your credit utilization below 30% on all of your open accounts. Even lower is better, but 30% gives you a little bit of buffer space in case you need to use your credit card for an emergency.

Raise Your Credit Limit

You can also try to raise your credit limit over time. Many credit cards will do this automatically once you establish a long enough credit history.

But you can also request credit limits yourself after a year or so has passed with a given credit card or lending company.

Raising your credit limit can provide several benefits. Most importantly, you’ll have more credit to use in an emergency scenario.

But larger credit accounts with higher limits reflect better on your credit score overall than having multiple credit cards with low credit limits.

#9. Do NOT Apply for Multiple Credit Cards

As touched on above, you should never apply for multiple credit cards at once. That’s because applying for credit cards often involves hard credit checks or inquiries, which lower your credit score. Having multiple of these occur at the same time could tank your score suddenly.

Furthermore, your credit score naturally takes a hit whenever you open a new credit account.

Opening multiple accounts is inadvisable if you want to boost your credit score. Instead, try only to apply for credit cards or loans that you feel confident you’ll get.

Related: How Many Inquiries is too Many?

#10. Keep Old Credit Cards Open

The longer credit cards and accounts are open, the better they reflect on your credit history. This can also have an overall positive impact on your credit score, so you should always strive to keep old credit cards open for as long as possible.

Don’t jump from card to card, closing old accounts, and opening new accounts to take advantage of special offers or opening bonuses.

This may seem satisfying in the short term, but it can do a lot of damage to your credit report and make you seem like an inconsistent borrower.

What is the Best Way to Build Credit Responsibly?

Building credit responsibly takes a little bit of time and patience, which may be why it’s so difficult for a lot of people.

The big credit bureaus want to see patterns of consistent and predictable behavior – this is largely what separates safe borrowers from risky ones. Since your credit score is a direct reflection of your lending “safety”, it makes sense.

Start Building Credit Responsibly.

Thus, the best way to build credit responsibly is to:

  • Open up only one or two credit cards or accounts
  • Use your credit cards or accounts sparingly and for a long time
  • Always make your payments on time and pay more than the minimum amount with every bill
  • Don’t use your credit cards for every purchase
  • Keep track of your credit score consistently

Doing this over just a few short years will result in a fantastic credit score well over 700 in most cases.

This will allow you to get most of the best loans on the market, significantly opening up your financial options for the future.

How Long Does It Take to Build Credit?

This is highly dependent on the individual and what credit accounts you have open. But in general, you can start from having no credit and go all the way to a good credit score of between 650 to 700 within just 1 to 2 years of solid credit payments.

However, it becomes more difficult to build better credit the higher your score goes. For instance, most of the major bureaus consider credit scores of between 750 to 800 to be “very good” or “excellent”.

It usually takes even responsible borrowers between 5 to 7 years to get to a credit score of 750 to 800.

That’s mostly because the credit bureaus look for long-term consistency to raise your credit score to those higher numbers.

But the rewards are well worth the effort. Having an excellent credit score of above 750 will allow you to take advantage of:

  • Excellent loans and interest rates
  • Very high limit loans (sometimes in the tens of thousands or hundreds of thousands of dollars)
  • Special banking and loan offers
  • And more

Furthermore, any mistakes or hits to your credit score can increase the amount of time it takes to reach excellent credit.

It’s best to start on the road to building excellent credit today. The sooner you start, the sooner you can reach a credit score of 750 or higher.

What Hurts My Chances of Building Good Credit?

There are lots of things (often called negative items) that can land on your credit report and make your credit score drop dramatically. Here are just a few

Late Payments

Late payments are by far the most common negative credit report item. They occur when you either miss your monthly credit card or loan bill or when you miss a regular bill payment, as most utility companies or landlords will then report that loss to the credit bureaus.

However, making a payment below the minimum amount also counts as a late payment for many vendors. To avoid this, make your payments on time and above the minimum amount when applicable.

Judgments

Judgments are credit report items that indicate that one or more lenders had tough times getting their money back from you.

In most cases, it also shows that lenders had to go to court to get paid back for their loans to you. These items can be particularly damaging since they indicate that you aren’t a trustworthy borrower.

Hard Inquiries

Hard inquiries are a necessary evil for the credit industry. Hard inquiries mean that credit card companies or lenders take a hard and thorough look at your credit score and reports, making them drop by a few points in the process.

But they normally only do this when they are investigating your accounts to see if you are a good choice for a loan or credit card. You should only accept these sparingly when opening the rare new account.

Collection Accounts

Collection accounts may show up on your credit report when your credit card or another account (loan account) is so past-due that the creditor turned the account over to a collection agency.

This means that the agency takes on the responsibility for trying to get you to pay back your debt. But in doing so, your past-due account shows up twice on your credit report, causing serious damage!

How Long Does It Take to Rebuild Credit?

It can take quite a long time to rebuild credit, particularly if a lot of negative items drag on your score over a few years. In fact, it’s arguably more difficult than beginning with a clean slate!

You should first examine your credit reports thoroughly to see where you can make improvements. For instance, maybe you’ll notice that most of your negative items are because of late payments for missed payments.

Or maybe your credit utilization rate is just too high, so you need to work on changing your daily habits, so you use your credit cards less frequently.

But you should also take into account the fact that negative items can stay on your credit report for quite some time.

Any bankruptcies can stay on your credit report for between 7 and 10 years. Other negative items can stick around for several years as well.

Ultimately, it may take between 2 and 10 years to rebuild your credit score from a poor rating of sub-400 all the way back up to 600 or higher just because of how long negative items stay on your reports. It’s better to just never have those negative items affect your reports in the first place.

Building Credit FAQs

Why Do I Need to Build Credit?

Building credit may seem like something you don’t need to concern yourself with. But it’s actually crucial if you want to enjoy extra financial security and freedom in the future.

Your credit score shows lenders and credit card companies whether you’re a trustworthy borrower. It’s an amalgamation of hundreds of different little factors and spending habits that is boiled down to a single number for convenience. By building your credit score up, you will look like a more trustworthy borrower to any lender.

Say that you want to buy a house in the future, but you need to take out a mortgage loan. The mortgage loan holder won’t feel comfortable giving you the immense responsibility of a loan totaling hundreds of thousands of dollars unless you have an excellent credit score.

As you can imagine, building credit early and consistently will open up more doors for you in the future.

Why Build Good Credit?

You should build good credit specifically since it will allow you to:

  • Apply for loans with better conditions, repayment terms, or interest rates
  • Apply for more loans without your credit score being too negatively affected
  • Apply for loans with higher limits or amounts

Bad credit, on the flip side, can bar you from many of these opportunities, making it more difficult for you to do things like open a business, buy a house, or even purchase a piece of expensive jewelry.

Do Rent or Utilities Affect Credit?

Sometimes. It depends on the landlord’s policies and the utility companies in question. Furthermore, only some credit bureaus actually accept rent or utility payments as legitimate credit score items.

Be sure to ask or investigate so you can take advantage of this and build up your credit score faster.

Why Does Having More Credit Help My Credit Score?

A higher credit score directly translates to more borrowing trustworthiness. A higher score means that:

  • You maintained your credit account for a longer period of time in good standing
  • Your credit accounts did not fall into delinquency due to late or missed payments
  • You did not misuse your credit accounts or open to many

Having a high credit score essentially means that you played by the rules and did make any major mistakes for at least several years.

This is great news to lenders that may be considering offering you alone that could take decades to repay.

Do I Have to Go into Debt to Build Credit?

Not at all. In fact, many of the best credit-building strategies involve not taking on excessive amounts of debt.

Instead, you should just use regular credit cards sparingly and responsibly over several years without missing any late payments. This is the best way to build credit from scratch without going into excessive debt.

Technically, you go into debt any time you use a credit card. But if you only use your credit cards for things you can immediately repay (for instance, for Christmas presents for your family one year), you can immediately repay that debt and reap the benefits of boosting your credit score without actually going into debt.

Can I Build Credit by Paying My Rent on Time?

In many cases, yes. See if your landlord reports rent payments to the credit bureaus. Alternatively, use services like RentTrack and Rent Kharma to build your credit using your on-time rent payments.

Do Debit Cards or Prepaid Cards Help Credit?

Not usually. Debit cards link directly to your bank account, so you make purchases with money that you already have. Similarly, prepaid cards can only be purchased with cash or real money in your bank account. Neither of them deals with debt or credit.

Can Savings Accounts Affect Your Credit Score?

Yes. Having a long-term savings account that you grow over time and that you use responsibly can show up on your credit reports. However, this varies from institution to institution.

Why is a Good Credit Score Important?

A good credit score is important so you can take advantage of excellent loans in the future and so that you aren’t barred from any financial opportunities.

5 Benefits of Building Credit

  • Competitive Rates on Insurance: Your insurance companies will assign you lower interest rates or copayment amounts based on your credit score.
  • Easier Time Renting a Place: Landlords are more likely to approve you for renting a property they own if you have an excellent credit score.
  • Better Loan Rates: Any loans you apply for will have better interest rates, so you’ll pay less money in the long run.
  • Apply for a Credit Card Easily: A good credit score makes it easier for you to apply for future credit cards.
  • Avoid Potential Security Deposits: Some rental properties won’t require you to put down a security deposit if your credit score is high enough.

Bottom Line: How to Build Credit

Ultimately, building credit the right way means doing so carefully, responsibly, and progressively over time. Don’t take out a lot of big loans or try to build credit by opening up lots of different credit cards.

Instead, use only one or two credit cards or accounts and pay off their small debts consistently over time.

Do this for just a few years, and you’ll have an excellent credit score faster than you think!

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Kim Pinnelli
Kim Pinnelli
Kim is a personal finance expert with a Bachelor’s degree in Finance from the University of Illinois at Chicago. She has been freelance writing for 13 years for a number of large publications. Kim thoroughly enjoys helping people take charge of their personal finances.