A recent report by the Bureau of Consumer Financial Protection shows that 11% of American adults have little credit history and another 11% have no credit history at all. This means 22% of the U.S. adult population may not have enough credit history to even have a credit score.
And without a credit score, you won’t be able to take advantage of certain opportunities, like getting the best deals on a mortgage, getting approved for an auto loan, or possibly even qualifying for an apartment lease.
In this guide, you’ll learn how to build credit so you can have enough credit history to receive a credit score. With this knowledge, you’ll have the chance to open up opportunities to hit your personal finance and lifestyle goals. This helps you know how to manage your money better because building your credit takes financial discipline and persistence.
First, let’s look at what credit is and why it matters; then how you can build credit; and finally, we’ll answer some commonly asked questions about how to build credit.
What credit is and why credit matters
Using credit typically means you borrow money from a lender and then pay it back later, sometimes with added interest on top. Credit is often used in the form of credit cards or loans. You can purchase almost anything with credit, which opens opportunities for you to get things you want or need, even when you don’t have the cash.
To qualify for most credit cards or loans, you’ll need a credit score. Your credit score helps lenders determine whether they should give you money by providing them insight into your payment history, your current debt, and other factors. If you always make on-time payments to your credit cards and loans and have multiple credit accounts with long histories, you’ll likely have a higher credit score and access to better opportunities from lenders.
Lenders check your credit score by using the services of three major credit bureaus: Experian, Equifax, and TransUnion. These credit reporting agencies keep track of your credit report, which lists all the different interactions and transactions that affect your credit score. Depending on the report, your credit score is usually shown as either a FICO score or a VantageScore number. Both credit scoring models range from 300 to 850, with 850 being the highest attainable score. The lower your score, the less likely you are to be approved by a lender.
Having a credit history and a good credit score makes it possible to access things you might not be able to otherwise:
- Getting a loan for a new car or the money to start a business could be out of the question if you haven’t already built your credit history to a reasonable standard.
- A limited credit history might mean you qualify for a loan but have to pay a much higher interest rate than other borrowers.
- You could have your housing options limited to friends and family because landlords often do a credit check on potential tenants.
- A cell phone provider may check your credit before approving you for a phone plan, and it might turn you down if you don’t have enough credit history or a good credit score.
When you have good credit, you’re able to get a loan or find a place to live on your own. Good credit opens opportunities in life, which is why knowing how to build credit continues to be as important as ever.
How to build credit
1. Apply for a secured credit card
Credit cards provide one of the best ways to build your credit, but the best ones typically require an established credit score to qualify. It’s a tough situation because you want to use credit cards to build and improve your credit score, but you may need a good score to get your foot in the door.
To help with this, many credit card companies issue secured credit cards. These types of cards are designed to help build or improve your credit, so their qualifications aren’t as strict. You will, however, need to pay a security deposit to open the account. The amount you deposit is often the same amount of credit a lender will let you borrow.
If you fully pay off your credit card debt on time each month while frequently using your secured credit card, your credit score will likely start building. It may take some time, but you may eventually get to the point where you can qualify for unsecured credit cards with higher credit limits, more benefits, and/or ways to earn rewards on your spending.
2. Apply for a credit-builder loan
Credit-builder loans provide a great opportunity for individuals who need to build their credit history but are having issues qualifying for credit cards or other types of credit. Because credit-builder loans are specifically designed to help build credit, they don’t often have any minimum credit score requirements for approval.
With this type of loan, you deposit funds into a locked savings account and a lender gives you an amount of credit equivalent to that savings deposit. You then have a certain period of time to pay off the loan. The idea is that if you make your monthly payments in full and on time, your credit will start to build. At the end of a successful loan, your savings will be unlocked and you’ll have access to your money again. Your credit history will also show a successful repayment which should then reflect positively in your credit score.
Credit-builder loans typically charge you an interest rate for their services, but they can be well worth the cost if you want to build your credit and don’t have other options.
3. Get a co-signer on a loan
If you don’t qualify for a loan because of your credit history, you can get help from a co-signer who has good credit. Having a trusted family member or friend sign onto the loan can make it more appealing for a bank or credit union to approve. This will help you qualify for the loan and get you started on building your own credit history.
Keep in mind, your co-signer is taking a risk by putting their name onto the loan contract along with yours. If you miss payments or don’t uphold the terms of the loan agreement, both your credit and your co-signer’s credit could be negatively impacted. To make sure this doesn’t happen, always make your payments on time for the required amount or more.
4. Become an authorized user
Becoming an authorized user on a credit card is similar to getting a co-signer on a loan. You may not qualify for a certain credit card yourself, but a family member or friend might and they can add you as an authorized user. You’ll get your own card to use and you’ll often also receive any benefits the card provides.
The best part, though, is being able to build your credit history as the credit card is used and paid off on time. The primary cardholder doesn’t even have to give you a card to help your credit. As long as they continue using the card responsibly, your credit should build.
Just remember that the primary cardholder is responsible for any spending on the account. So if you are using the card, be sure to make your monthly payments on time or you could end up negatively impacting the credit score of your trusted friend or family member.
5. Pay your monthly bills
If you consistently pay monthly bills on time through a bank account, you can use Experian Boost to potentially raise your credit score in as few as several minutes. Experian Boost is a service provided by Experian, one of the three major credit reporting agencies.
Once you’ve signed up for a free Experian Boost account, you simply have to connect your bank account(s) used to pay your bills and then choose and verify the positive payment history you’d like added to your credit report. You’ll then see any boost results immediately. Experian Boost doesn’t guarantee an increase in your FICO score, but using it will also never negatively affect your score because it only considers positive transactions.
The types of bills that work with Experian Boost include Netflix subscriptions, phone bills, and utility bills. Because Experian Boost is free and available from a well-known source, it could be worth a shot if you’re looking to improve your credit score.
6. Practice good money habits
To learn how to consistently build and improve your credit, consider implementing and practicing these good money habits in your life:
- Keep your credit utilization low. Your credit utilization is how much credit you’re using divided by how much total available credit you have. For example, if you have a credit line of $1,000 and you have a current credit card balance of $300, then you have a credit utilization ratio of 30%. You typically want to keep your credit utilization low (under 30%) to keep your credit from being negatively affected.
- Pay all your bills on time. Your payment history is a major determining factor in your credit score. If you pay all your debt on time, you won’t see any negative marks on your credit history from missed payments or late payments.
- Don’t cancel credit cards. It may be tempting to cancel a credit card once you pay it off or if you feel like you don’t use it as much. But if the card has no annual fee, it could be worth it for you to keep it. Because the length of your credit history is a factor in your credit score, it’s better to have credit accounts with long histories instead of short ones.
- Stay diligent on student loan payments. Student loans are a type of credit, so they affect your credit score. If you miss a student loan payment, it will negatively impact your credit score, as with missing a payment on a credit card.
- Use multiple types of credit. Lenders like to see multiple sources of credit on your credit history, so try to diversify the kind of money you’re borrowing if you can. For instance, responsibly paying on credit cards, a car loan, and a mortgage is better than solely having credit card accounts.
- Don’t open too much credit at once. Credit card issuers and financial institutions will typically initiate a hard credit check to get your credit score from the different bureaus before they agree to grant you a loan or line of credit. If you have too many recent hard inquiries during a short period of time, your credit score may go down. This is because it can look to a lender like you’re trying to open a lot of new credit lines or loans at once. Spreading out your hard inquiries can help reduce the risk of your credit score dropping.
7. Check your credit score regularly
You should check your credit score frequently to stay updated on any financial changes that could affect it. With a service like Credit Karma, it’s easy to see how your credit score is doing and what factors are affecting it. This information can also help you stay motivated to keep improving your credit score.
Credit Karma gives you access to your scores and reports from both TransUnion and Equifax, and the services are completely free. You can also sign up to receive free alerts from Credit Karma if anything changes on your TransUnion credit report. This could help you stay on top of adjustments to your credit score or spot possible identity theft. Because it’s a free service, it’s worth it to sign up and keep better track of your finances.
FAQs about building credit
How long does it take to build credit?
Building credit can take weeks, months, or years, depending on your starting credit score and where you’re trying to end up. If you have no credit history at all, you’ll likely need to spend a year or more using credit cards and/or loans to build your credit. If you have bad credit, how long it can take to improve your score may depend on the types of negative remarks on your credit history.
It can get more difficult to improve your credit score as it gets better and better. This is because you’ve already done everything you should to get to that point and you just have to continue using credit responsibly.
How can I raise my credit score in 30 days?
To improve your credit score in 30 days, you’ll need to go through the same process as someone who’s been trying to raise their credit score for months or years. Use credit, like a credit card or loan, and make your required payments in full. This may not make a massive difference in 30 days, but it’s one of the best ways to raise your credit score. In addition, you can use a tool like Experian Boost to see whetehr you can instantly raise your credit score by getting monthly Netflix, phone, and utility payments reported on your credit file.
What credit score do you start with?
The credit score you start with is no score at all. Before you start borrowing money, there’s nothing to report to the credit bureaus and not enough information to create a credit score. Once you borrow money for the first time, get your first credit card, or become an authorized user on another person’s credit card, the credit bureaus will start building the info they need to give you a credit score. From then on, your score will depend on how responsibly you’re using your credit. The lowest credit score is 300, but you wouldn’t likely start at 300 unless your credit habits were extremely poor.
How can I build my credit at 18?
If you want to know how to build credit at 18 and aren’t yet able to qualify for a credit card or loan on your own, consider being added as an authorized user on the credit card of a close friend or relative. You may also be able to qualify for a loan if you get a co-signer who has good credit. These methods allow you access to credit lines without having a good credit history yourself.
If you aren’t able to go the route of being an authorized user or finding a co-signer, consider getting a secured credit card or credit-builder loan. These borrowing methods require you to deposit money upfront, but they typically don’t involve strict credit requirements to qualify. An example of a secured credit that can help you build your credit is the First Progress Platinum Prestige Mastercard Secured Credit Card.
Once you know how to build credit, it becomes easier to improve and maintain your credit throughout your life. Of course, you’ll need to put in the time and effort to establish good financial habits, like routinely checking your credit score and always paying your debt on time.
As you become better at managing your credit, though, your overall financial expertise will increase and you’ll find more opportunities available to you. If you can work your way up to an excellent credit score, you’ll increase your chances of qualifying for most credit cards and the best personal loans, which can be helpful for reaching your financial goals.