How To Build Credit: A Complete Guide

Making the right decisions can open doors for you in your life. That’s especially true with decisions around your credit. How you borrow money and pay it back creates a track record that may make lenders more or less likely to work with you in the future. A major part of knowing how to build credit is knowing there’s a right way to go about it.

What Is Credit?

Credit is being able to take on debt with the expectation it will be paid back. The history of your credit use is kept track of in credit reports created by the three credit bureaus: Experian^®, Equifax^® and TransUnion^®. Your credit reports can vary slightly between bureaus. These reports are statements that track your open accounts, show your payment history and include financial mistakes, from late payments to bankruptcies.

Your credit score is different from a credit report, but it serves a similar purpose. While your credit report is a detailed history of your credit, your credit score is a summation of that history into a number. Numbered 300 – 850, your credit score offers a glance into how well you manage your debt. Like with credit reports, each bureau assigns a different score, so you may have some variance between them.

In general, FICO^® score carries the most weight. It’s determined using a scoring model by the Fair Isaac Corporation. This score is used by most lenders when determining whether you qualify for a loan.

Why Is Building Credit Important?

Building credit is important because it signifies your financial stability and responsibility. When you need to build trust with a lender or a landlord, having good credit can help you get your foot in the door. Whether you’re getting an apartment, buying a house or financing a car, a good credit score can not only help you secure the loan or lease, but it could help you get a better deal.

What Is Good Credit?

Credit scores range from 300 – 850. Most financial institutions regard a FICO^® score of 620 as good credit and a score of 740 or higher as excellent credit. With a score of at least 620, you’re typically considered in good financial standing. The higher your score, the easier time you’ll have finding lenders and credit card companies to work with. Plus, with a higher score, you may receive other perks, like a lower interest rate or higher credit limit.

How Long Does It Take To Build Credit?

How long it takes to build credit will vary from person to person, but establishing an initial credit score takes at least 6 months. Once you have a credit score, you may be able to improve your credit score in as little as 1 – 2 months.

How long it takes to build your credit can also depend on where your credit score stands at the moment. If your score is in the 600s and you want to improve it, making consistent payments and not accruing debt is your best move. You could see your score grow quickly.

However, if you have negative strikes on your credit report, they will stay on your report for up to 7 years. While late payments knock your score down, major issues like foreclosure or bankruptcy can leave a dent. If you have something like that on your credit report, you’re going to need to slowly and deliberately build your credit to repair it.

How To Build Credit Using A Credit Card

When building credit, you’ll want to make on-time payments as well as the minimum payment that’s due for the credit card. Paying off your credit card can help build your credit when done correctly.

1. Apply For The Right Type Of Credit Card

If your credit is low, you need to apply for the right card made for building credit. After all, credit card applications can hurt your credit. You don’t want to waste your time or lower your score by applying for a card that’s not for you.

Look for a card with no annual fee and that reports to the three major credit bureaus. Ideally, you won’t need a low interest rate because you’ll be paying the card off monthly. Interest only comes into play if you carry the balance into the next month.

A smart move is to get a secured credit card. These kinds of credit cards are secured with a deposit you pay, which can range from $50 – $500. They have low credit limits and are used when you pay them off every month.

Whether it’s a secured or unsecured card, responsibly using a credit card can be a great way to establish payment history and show how you can manage your finances.

2. Become An Authorized User

If you’re having trouble qualifying for your own credit card, becoming an authorized user on someone else’s card may be a better option. This happens when someone you know, like a close friend or family member, adds your name to their existing account. This gives you the ability to make purchases on the card without being responsible for the payments – though you should pay your authorized user for charges you make on the card.

But this is only a good idea if you can confidently trust the cardholder to make their payments on time. Why? When the main user of the card pays their bill each month, this payment will also be reflected on your credit report, ultimately boosting your score. On the flip side, this means if the cardholder misses payments or makes them late, it could end up hurting your credit.

3. Make On-Time Payments

Lenders want to know you’re capable of making timely payments, so the importance of making on-time payments cannot be understated. Missing payments will negatively impact your score, so when making purchases with a credit card, you should always know exactly when and how you’ll be able to make your next payment.

Because of interest and fees, missing a payment can further set you up for failure down the road. Your debt will grow, making it harder to pay down in the future. Remember that it’s important to pay down as much debt as you can every month. If you can’t pay it off fully, pay off as much as you can to lower your debt.

How To Build Credit Without A Credit Card

If you don’t have a credit card or don’t want one, there are a few steps you can take to build your credit without a credit card.

1. Take Out A Loan

Instead of using a credit card to build credit, you can build credit with a personal loan, car loan or credit-builder loan. The point is that, with a loan, your regular monthly payments show your ability and commitment to repay your debt.

With a personal loan, you’ll receive a lump sum at a fixed-rate which you can use for a variety of purposes. Debt consolidation, home repairs and medical expenses are just some of the things people use personal loans.

A car loan is another great way to build credit without a credit card. These loans typically come with 2- to 7-year repayment terms. Be aware, though, that longer terms come with higher interest rates. So, while your monthly payment may be less, you’ll pay more in interest over time.

And finally, credit-builder loans are loans specifically designed for people with little to no credit. These loans require a small deposit upfront, which is then paid back each month. The payments are reported to the credit bureaus, building credit very similarly to a secured credit card.

2. Make Student Loan Payments

If you have student loans, they can be used to build your credit without a credit card. Simply pay them on time every month. If you have multiple student loans, you should prioritize paying off the ones with high interest first. By making extra payments or larger payments toward the principal, you can pay down the debt quicker while building your credit.

3. Use A Tool To Boost Your Score

Tools like Experian Boost® and UltraFICO^® incorporate other information into your credit score than what’s standard. Experian Boost, by the credit bureau Experian, tracks how you pay monthly bills, like phone and internet bills, and factors them into your credit score.

Similarly, UltraFICO^®, by the FICO^® credit scoring service combines your banking information with your credit score. This includes how you use your checking account and how good you are at saving.

Some creditors do recognize tools like UltraFICO^®, but you may have to ask. If you’re applying for a new line of credit, see if the creditor will consider your UltraFICO^® score.

4. Track Your Credit Report

Information is power. Whether you have a credit card or not, it’s important to consistently monitor your credit report while building credit. Knowing where you stand can help you plan your next financial milestone, so be sure to check your credit report regularly.

If you see any inconsistencies in your credit report, inquire about them immediately, as fixing a small mistake could quickly boost your score. When in doubt, you can also consult a financial advisor for additional ways to improve your credit score.

The Bottom Line: It’s Important To Build Credit Before Applying For A Home Loan

Your credit is the foundation for any future credit or loan application. If you have a history of paying your debts back on time, lenders are more likely to want to lend to you and may offer you attractive perks to make you a client. It’s important to build your credit, especially if you’re applying for a home loan. It can save you money in interest and having good credit will put you on solid ground while making the big purchase.

If you have a good or excellent credit score and are ready to take the step, get started today on the journey to homeownership.