How to Build Credit: The Essential Guide

Get a secured credit card

A secured credit card is a smart place to start if you’re building credit from scratch. Unlike traditional credit cards, you’ll start by paying a deposit upfront to open your account. Once paid, you can use your secured credit card just like a regular card.

This security deposit acts as collateral so if you ever default on the card, you won’t receive your deposit back. By regularly using your credit card for everyday purchases and making on-time payments each month, you can build a positive credit history.

Before opening a credit card, remember to assess your financial habits and whether you can manage the card responsibly. Americans’ credit card debt increased by over 40 billion dollars last year.¹

To avoid falling into credit card debt and use your card as a credit-building tool, ensure you follow these two steps:

1. Do not max out your card.
2. Pay your bills on time and in full every month.

These simple steps can help you establish your credit as you build up a history of responsible credit management.

Not interested in opening a credit card? Try these methods to start building your credit scores.

• Become an authorized user
• Get a credit-builder loan
• Report rent and utility payments
• Pay your student loans
• Maintain smart credit habits

Become an authorized user

If you can’t get a credit card in your name, you can ask a friend or family member with a strong credit history to add you to their account as an authorized user.

When you become an authorized user, you’re added to an existing account and get your own credit card. This allows you to make purchases with their card as if it’s your own and have the account’s payment activity show up on your credit report.

Assuming the primary cardholder is financially responsible, being an authorized user allows you to reap the rewards of their positive credit habits in your own credit scores.

Can becoming an authorized user negatively affect my credit score?

As an authorized user, all account activity on the card will show in your credit report, regardless of whether the activities are considered good or bad. If the primary cardholder falls behind on payments or maxes the card out, your credit also suffers.

Get a credit-builder loan

If you have no credit or limited credit history, secured loans like credit-builder loans are a great way to build up your score. You won’t need proof of good credit to be approved – you’ll just need to ensure you can afford to make the monthly payments.

How does a credit-builder loan work?

Credit-builder loans are different from traditional loans in that you’re essentially repaying a loan to build credit, and you don’t get the loan’s proceeds until you repay it in full. That’s the opposite of how loans usually work, where you get the money upfront and pay it back later.

The loan amount is held in a bank account while you make payments toward it. You’ll continue to make fixed monthly payments until the end of the loan term, at which point the lender returns the total amount back to you, plus any interest you paid.

Since your payment history has the largest impact on your credit (it accounts for 35% of your credit scores), a credit-builder loan helps build a history of on-time payments.

Report rent and utility payments

If you lack credit history but always pay your rent and utility bills on time, consider using a rent-reporting service to add that information to your credit reports.

By linking your account, you can add on-time payments for rent, phone, and utility bills to your credit report, making it easy for new credit builders to build a positive payment history. If a payment negatively affects your credit score, you can remove the negative payment to undo the effect.

Chip away at student loans

While we don’t recommend taking out a loan to build credit, your student loans can help build credit since they’re reported to the credit bureaus.

Student loans are installment loans, similar to auto loans or mortgages. Managing them responsibly by making on-time monthly payments can help you build a credit history.

Building credit takes time and consistency. You won’t see drastic changes overnight.

4 key habits for healthy credit

• Prioritize on-time payments: Make all payments on time and in full each month (if not, pay at least the minimum amount due each month). Set up automatic payments to avoid accidental late payments and subsequent fees.
• Improve your credit utilization: Aim to keep your credit utilization (the amount of credit you spend) under 30% of your total limit.
• Don’t apply for too many credit accounts at once: New credit applications can temporarily cause your score to drop. Wait at least six months between new credit applications.
• Regularly monitor your credit report: Schedule a recurring check-in to review your credit reports for accuracy. You can get your credit report three times a year for free through AnnualCreditReport.com.

In addition to practicing smart credit habits, you should also know what credit mistakes to avoid that can unknowingly damage your score.

3 habits to avoid as you build credit

• Over-spending: Have a budget in place to ensure you pay off your accounts in full every month to avoid damaging your score and falling into debt.
• Canceling old credit accounts: Even if you’re no longer using an old credit account, keep it open – canceling old accounts can lower your credit age and in turn, lower your credit score.
• Only making the minimum payment: This can extend your repayment timeline and lead to more interest charges. Make sure you pay off your balance in full each month.

While the credit-building process requires some time and effort, your hard work can pay off when your strong credit score gives you access to better credit cards, interest rates, and loan terms. Keep monitoring your score, stay the course, and watch your credit score grow!