How to Build Credit

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If you haven't already, it likely won't be long until you encounter a life situation where someone asks to check your credit. From buying a new cellphone to getting a mortgage, credit reports and scores are used by businesses to evaluate your creditworthiness and establish your borrowing terms.

Credit scores are based on how you've managed debt in the past, and lenders use your score to establish the level of risk you pose as a borrower. If you have a long history of making on-time payments and managing debt responsibly, you likely have a good credit score and may have a better chance of getting approved for credit with favorable terms. If you don't have much experience with credit or have negative information such as late payments in your credit history, you may have difficulty being approved for a new account. And if you do get approved, you'll likely get less favorable terms.

Building a good credit score can take time, but the benefits of doing so are numerous. Even if you don't expect to apply for credit anytime soon, it's important to start working on it now so you can build a good score for when you need it.

How to Build Credit With a Credit Card

Credit cards are one of the best credit-building tools available. They're the most commonly held form of credit, and can be used in everyday life in ways that help you build credit over time. Using a credit card to buy groceries or pay for travel, for instance, and then paying off your bill in a timely manner demonstrates to lenders that you can responsibly manage debt.

If you want to build your credit using a credit card, it's important to remember that the way you use it will determine whether your scores are hurt or helped. Signing up for a credit card to build credit only to max out your balance and miss payments will leave you worse off than before. Ensure that you make timely payments on your debts, the goal is to build up enough credit to acquire some of the best credit cards available.

Here are four strategies for responsibly building good credit using a credit card:

  1. Open your first credit card account. Which card you apply for should be based on whether you have any credit history. There are credit cards for fair credit, bad credit, good credit, and for those that have no credit. If you have at least some credit history, you could consider applying for a beginner card (such as a store card) that's easier to get approved for. If you have no credit history, you'll likely need to apply for a secured credit card in order to be approved. Once you have your first card, use it to make small everyday purchases that you can easily afford. Pay your balance in full each month to start building a history of on-time payments, showing lenders that you're a responsible borrower.
  2. Get a secured credit card. As mentioned, if you have no credit or poor credit, your credit card options will likely be limited. However, you may still be able to qualify for a secured credit card. This type of card works like a traditional credit card, except that it requires you pay a security deposit upfront, which the issuer then holds as collateral against what you spend. If you were to stop making payments and default on the account, the issuer keeps the deposit to cover the debt. This protects credit card issuers financially and means they're able to approve people with a less-than-stellar credit history. Once you get a secured card, use it to pay for small everyday items and pay your bill on time and in full each month. Over time this will add to your payment history, which can help build your credit score.
  3. Become an authorized user. For people who have trouble qualifying for a credit card on their own, becoming an authorized user could be a helpful solution. As an authorized user, you'll be added to an existing account and be given your own card to use. The account's positive payment history is then added to your credit report and factored into your credit scores. However, since you're not responsible for managing the account and making payments, the degree to which it can help your creditworthiness is limited.
  4. Request a credit limit increase. If you already have a credit card, there are ways you can make sure you're getting the most credit benefit out of it. First, use it and pay your bill in full and on time each month. Then, after you've had the card for several months, consider requesting a credit limit increase. Doing so could help improve your credit utilization ratio, which is the ratio of your balances to your credit limits. Your credit utilization is an important credit scoring factor, and keeping your balances under 30% of your credit limits can help your scores. And while 30% is a great starting point, the lower your credit utilization, the better it is for your scores. Lenders may not approve requests from accounts with large outstanding balances, so it's best to pay down as much of your debt as possible before requesting a limit increase or applying for new credit. If you are approved for a limit increase, resist the urge to ramp up your credit card spending.

How to Build Credit Without a Credit Card

While credit cards are a great tool for building credit, they aren't your only option. Since your credit score is a reflection of how well you've managed debt in the past, any accounts you have that are reported to credit bureaus in good standing have the potential to help you boost your score.

Even if you're just starting out and don't yet have any credit accounts, there are other ways you can build your score over time. Here are four strategies for building credit without a credit card:

  1. Pay all your existing loans diligently. Payment history is the most important aspect of your credit score, so pay close attention to your existing debt. Make sure to submit all your payments in full and on time to maintain a good payment history. Another factor in your scores is the progress you've made on paying down your loans. Getting loan balances closer to zero indicates to lenders that you're able to repay your debts.
  2. Installment loans can give your scores a lift. If you don't have a long credit history, an installment loan, which you pay back through set monthly payments, could help you build your score. Auto, mortgage, personal and student loans are all types of installment credit. That means the loan you might borrow to buy a car or pay for your education has the added benefit of helping you build credit, assuming you make all your payments on time. You shouldn't take out a traditional loan simply to build your credit, but there are credit-builder loans that work differently and are intended for precisely this purpose.
  3. Nonprofit lending circles. A lending circle is an organized group of peers that lend to each other. Through this process, communities help each other build credit. The Mission Asset Fund is an example of a popular nonprofit that facilitates this type of borrowing and credit-building.
  4. Have your monthly bills added to your credit report. While you may have a long history of paying bills on time, things like your cellphone and utility bills won't automatically help you build your credit score. You can request to have these bills added to your credit report by using Experian Boost . Boost works by allowing Experian to connect to your bank account and add on-time payments for utility, phone and streaming service bills to your credit report so they can be reflected in your FICO® Score powered by Experian instantly. You can also have your monthly rent payments reported to Experian by using Experian RentBureau.

How to Establish Credit When You Have No Credit History

There are many Americans with no credit experience—especially among younger populations. And though it may seem difficult, it is possible to build a credit score with no credit history. In addition to some of the strategies listed above, consider the following methods for building credit from scratch.

How to Establish Credit:

  • Ask someone with established and good credit to help you get a loan or to add you as an authorized user to one of their existing credit card accounts. Doing this will allow you to have your first account listed in your credit report, allowing you to build a positive payment history. Over time, your payment history and experience with this account will help you build a score of your own. From there you can apply for additional credit on your own.
  • Apply for a credit account that is tailored for people that are new to credit. Look for loans that are designed for people with no credit history. Credit-builder loans, for instance, can help you start building credit; you can get one of these loans from a community bank or credit union. Before applying for a loan with the intention of building credit, always confirm that the lender will report your account and payment history to one or more of the three main credit bureaus (Experian, TransUnion and Equifax).

The Basics: How Credit Works

Your credit reports and score are a reflection of how you've managed debt in the past. Your credit reports contain information reported by your creditors that's used to calculate your score. The three-digit score—which typically ranges from 300 to 850—evaluates the risk you pose as a borrower. Lower scores mean more risk, and vice versa.

Your credit becomes important when you ask a potential lender to extend you some type of credit. This can happen for small things—for example, your credit reports may be checked if you finance a new cellphone—and is also required for large purchases, such as taking out a mortgage for a home purchase.

Good credit is something you earn as you show you can manage your debt obligations well. And there are rewards for managing your debts responsibly. When you apply for additional credit with a good credit score, it's more likely you'll be approved and may get favorable terms from the lender.

Types of Credit

Credit accounts come in many forms, but when it comes to your credit reports and scores, there are three major types of credit that you will encounter.

  • Revolving credit: Revolving credit accounts have a set credit limit that you can draw upon, pay back and draw upon again. Credit cards are the most popular form of revolving credits, followed by lines of credit.
  • Installment credit: Installment credit is debt you borrow and pay back in fixed monthly installments. This includes personal loans, student loans, auto loans and mortgages.
  • Service credit: Service credit is the type of account you have with anyone who provides you with a service and bills you monthly. Your utility and cellphone bills are examples of service credit accounts. These bills can help increase your FICO® Score powered by Experian when you use Experian Boost. On the other end of the spectrum, your account could be sent to a debt collector if you miss payments. If a collection account is opened in your name, this could appear on your credit report and negatively impact your score.

How to Build Credit Fast

Building your credit in a short period of time can be challenging, but there are a couple actions you can take that can help speed up the process.

  • Improve your credit utilization. Your credit utilization is one of the few aspects of your credit report that you can change quickly. Credit utilization is calculated by dividing the total of your credit card balances by the total of all your credit card limits. You can improve your utilization most quickly by paying down your credit card balances. Increasing your overall credit limit can also help if your lender agrees to it.
  • Try using Experian Boost. As mentioned above, Experian Boost is a tool that gives you credit for past on-time payments. With your permission, it connects to the bank account(s) you pay bills with and looks for qualifying on-time payments. Once found, a record of these on-time payments is added to your Experian credit report and could instantly raise your FICO® Score. The average Experian FICO® Score increase among Boost users who see a lift is 13 points.

In addition to the strategies above, you'll want to stick to the traditional approaches to building your credit. Once you open your first credit account, it can take some time before you see the account listed in your credit reports. As you continue to use credit, keep track of your accounts and payment history, and eventually you should see your information impact your credit score. This process can take time, but with some patience and discipline, you'll eventually see results.

The Importance of Staying On Top Of Your Credit

One of the most important aspects of building a good credit score is consistency. To achieve and maintain a good score, you need to develop good credit habits and stick with them. Remember, building credit is a long-term endeavor and it's important to always stay on top of what and how things can impact your score.

As you build your credit, understanding the factors that go into score calculations will allow you to monitor your behavior and ensure everything you do it's helping, not hurting your score. Here are some of the key attributes of your credit scores and areas to watch as you build your credit.

Information on your credit report that can influence your credit scores includes:

  • Payment history
  • Credit utilization
  • Types of credit accounts you have open
  • How long you've been using credit
  • Your debt balances
  • Bankruptcies
  • The number and recency of credit accounts you've applied for

How to Get Help With Your Credit

If you feel you need extra help building or repairing your credit score, there are plenty of resources available. First, it's important to stay educated on how credit works and what impacts your scores. You can read all about credit topics on Experian's education blog.

You can also seek professional help from a credit counselor, who is a trained professional that can help you work through issues with your debt and credit. Credit counseling agencies often offer free consultations where you tell them about your financial situation. If you decide to work with a counselor, they'll help you understand how to fix the financial issues you're dealing with, which could ultimately help you improve your credit scores.

Financial Behaviors and Credit Mistakes to Avoid

As you build your credit, there are several financial behaviors that can wreak havoc on your scores. As you work to build a good score, it's important to avoid these moves. Here are three common mistakes people make that can have a negative impact on credit:

  • Not having a budget: Without a budget, it's easier to overextend your finances and put yourself in a position where you can't afford your monthly expenses. Budgeting helps you plan out your income, assigning certain amounts for particular expenses each month. The lack of a budget could lead to you missing payments on your debts, which can have a serious impact on your credit scores. A budget helps ensure you put enough money to the side to cover all your financial obligations.
  • Lack of caution when it comes to sharing your personal information: When hackers or identity thieves get their hands on your personal information, there's a chance they could use it to open fraudulent credit accounts. This can happen without you noticing and can wreak havoc on your credit. While it may be an extra step, taking precautions to safeguard your personal information is critical to making sure that fraudsters don't use your identity to open bogus accounts. You can protect your information by using strong, unique passwords, limiting when you give out your information, and heightening your awareness of where and with whom you share your personal information.
  • Applying for multiple credit cards in a short period: A flurry of credit card applications can be a red flag for lenders. Credit card applications also typically result in what's called a "hard inquiry" appearing on your credit report. The effect of one hard inquiry on your score is minimal, but several can have a bigger impact. Try to limit the number of times you apply for credit in a short period. You can do this by researching your credit opportunities beforehand, ensuring that your credit is good enough to get you approved. To be matched with cards based on your unique credit situation, try using Experian CreditMatch™.

Regardless of whether you are building your credit from scratch or rebuilding a struggling score, regularly monitoring your credit is critical to make sure your efforts are paying off. To keep your eye on your credit reports and scores, consider enrolling in Experian's free credit monitoring tool so you can regularly log in to check on your progress. You can also get a free copy of your credit reports and scores from Experian.

How Good Is Your Credit Score?

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