How to Build Credit in 6 Easy, Smart Steps

To hit most major financial milestones, you’ll need two main ingredients: sufficient savings, and good credit. Most folks can wrap their head around the savings piece. Credit, however, tends to be a little more cryptic. 

Whether you’re buying a home, taking out a car loan, or paying for school, credit allows you to accomplish your goals without having to pay thousands of dollars in cash upfront. Instead, your lender can use your credit score to gauge your financial responsibility and front you the money in the form of a loan. If you’re trying to refinance existing loans, a strong score can also help you qualify for low interest rates—which could help you lower your monthly payments, save money, and even get out of debt faster. But what if you have sub-par credit—or even no credit at all?

According to a 2022 study, 19% of all Americans are “credit invisible,” which means they don’t have a credit score at all. Credit-invisible borrowers might find it hard to get a good rate for a loan, or may not qualify. The good news is that you can build up a strong credit score from scratch with just a few smart, simple steps. Here’s how to boost your score and improve your candidacy for a new loan or refinance.  

What is My Credit Score?

Before focusing on how to build good credit, it is important to understand what a credit score means. A credit score is a numerical representation of your credit history. This is not to be confused with a credit report, which represents the history of your borrowing from day one. Your credit score under the FICO (Fair Isaac Corporation) scoring model, the industry standard, will be between 300 and 850. Within that, your score will generally be divided into a few different ranges. Here’s what those credit score ranges mean.

• 300-629: Bad credit

• 630-689: Fair credit

• 690-719: Good credit

• 720-850: Excellent credit

The better your credit report and history, the better your credit score. Most lenders look for a FICO score somewhere in the good to excellent range, though some will consider borrowers with slightly lower scores. If you don’t have a fair to good credit score, however, it may be time to double-down on your credit-building strategy. 

6 Ways to Build Credit Responsibly

If you don’t have a credit score already, it might feel like an uphill battle to get started. However, Experian, one of the three major credit bureaus, estimates that it only takes between three and six months of regular credit activity for a credit score to be calculated. Here’s how to make the most of that time and boost your credit fast.

1. Become an authorized user on someone else’s credit card

If you have a willing friend or family member with good credit, becoming an authorized user on their credit card account is a great step to building credit. You don’t even need to use the card once your information has been added. As long as they continue to practice good credit habits, your credit will grow alongside theirs. Some of those good habits include paying bills on time and keeping a low credit utilization ratio—in other words, keeping credit card balances at a relatively low percentage of the available credit limit. Conversely, if the primary cardholder is not practicing good credit habits, your score will reflect these poor practices. So, be careful about who you ask to sign on with.

2. Cosign on a credit card or loan

If you don’t have strong credit, consider finding someone to cosign a credit card or loan agreement. Using a cosigner who has strong credit can help you piggy-back off that person’s credit score to get low interest rates and good deals on new credit accounts. To get the most benefit, you will again want to pick someone who has healthy personal finance habits. Also make sure it’s someone you have a good relationship with; after all, your cosigner has to agree to take on the card balance or loan if you are unable or stop paying. 

3. Put your rent payments on your credit report

Paying a mortgage on time each month is a great way to maintain a strong credit rating. If you’re renting, you can still leverage your on-time rent payments to boost your score—you might have to do a little more legwork. Not all landlords report this information, but there are a number of services you can sign up for that will report your rent to credit bureaus for you. As a result, you’ll get points for your responsible payment behavior, and your score should increase. You can also use similar services to get credit for paying your utilities or cellphone bills on time.

4. Student loans 

Often a student loan is someone’s first endeavor into establishing their credit. Paying off a student loan may not be the fastest way to establish credit, but taking out your first loan when you’re just 18 or 19 will mean you will have a longer credit history when you graduate. The key is making your student loan payments on time and in full. Graduates might consider setting up automatic payments, i.e., connecting their bank account to their student loan account so they don’t have to pay manually each month. (Bonus: Many student loan¹ lenders, including Earnest, offer borrowers an interest rate discount just for setting up Auto Pay².) 

5: Use a credit-builder loan

Credit-builder loans are a nice option for someone who might not qualify for a personal loan, but who still wants to build their credit. This type of loan is designed for people with no to low credit and can be a relatively easy way to start building up your payment history. After being approved for a credit-builder loan, the lender will place the loan amount in a locked savings account. The borrower will make payments toward the loan until it is completely paid off. At that point, the savings account is unlocked to the borrower. At that time the lender will also report to the credit bureaus your payment habits and start your credit history. This option is generally offered by credit unions, community banks, and smaller financial institutions, and the loan amounts can range between $300 and $1500.

6: Apply for a secured credit card

If becoming an authorized user on a family member or friend’s credit card isn’t an option, a secured credit card is another way to build up your credit. With a secured credit card, you’ll have to provide a security deposit. This gives the credit card issuer some reassurance that you’ll be able to pay them back. This deposit amount will typically serve as your credit limit. While this system might sound similar to a debit card, using a secured credit card will count towards your credit history, while using a debit card won’t. Some card issuers also offer a “graduation” component, allowing the cardholder to transition their secured card to a traditional card after establishing a credit history. At that point, you’ll get your security deposit back, and you’ll have the option to apply for a credit limit increase. 

Build credit with good habits 

Your FICO score is determined by the following factors, each of which is weighted differently. 

• Payment History (35%)

• Credit Utilization (30%)

• Credit History (15%)

• New Credit (10%)

• Credit Mix (10%)

Once you have established credit, you have to maintain or improve your score. Some good habits for a healthy credit score include:

• Check your credit report often: The best way to stay on track with your credit-building goals is to check your report regularly. Sign up for a credit-reporting service for constant tracking. You can also pull a free credit report once per year via annualcreditreport.com. Word to the wise: errors are surprisingly common and can hurt your score. Make sure everything on your report seems correct, and report any errors to the relevant credit bureau immediately. 

• Making on-time payments: Not only is being on time a great professional skill, but it will also establish trust with lenders. That can make it easier both to qualify for new loans and improve your application for refinance. Plus, missed payments can trigger hefty fees and drop your score by more than a few points. 

• Paying your balance in full: Rather than making just the minimum payment or carrying a balance from month to month, try to make a complete monthly payment on a loan or credit card whenever possible. This will show lenders and credit card companies that you are only spending what you can afford.

• Credit utilization: Your credit utilization ratio is the sum of all your credit balances compared to your total cumulative credit limit. Some recommend that you keep your credit card utilization below 30%, while others recommend keeping it even lower. 

• Keep old accounts active: If you have an old credit card or credit account that doesn’t cost you an annual fee, consider leaving it open. Even if you no longer use the card, it shows a longer credit history. Its credit limit will also be counted towards your total available credit, thus boosting your credit utilization ratio. If you do need to close the account, be sure to take steps to limit any negative credit impact.

• Open new accounts: Showing that you are continuing to open up new lines of credit is a positive sign for credit bureaus. Opening a travel credit card or card with cash-back rewards, for example, can also help you budget for vacations and other goals. However, be careful not to open too many accounts at the same time. Whenever you apply for new credit, the lender or creditor will conduct a “hard check” on your credit report. Too many hard credit checks can bring your credit score down. 

• Have both revolving and installment credit accounts: Credit mix is a significant component of your score. Maintaining a strong credit mix means having multiple types of credit, i.e. both revolving credit like credit cards, and installment accounts, like student loans or auto loans.

All these habits can help you improve your credit profile and bolster your financial standing in the eyes of credit bureaus. Over time, that will make you a stronger candidate for new loans—including auto loans, mortgages, and private student loans. So, if you’re hoping to buy a home or car or go back to school in the future, credit building is a must. 

Plus, the better your score, the lower the rates you could qualify for if you ever decide to refinance³. That can help you take advantage of dropping interest rates and save some serious money over the life of your loans.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Before applying for private student loans, it’s best to maximize your other sources of financial aid first.  It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grants, and work-study opportunities.  2) Next, fill out a FAFSA(R) form to apply for federal student loans.  Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if you're struggling with your payments.  3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2.  For more information, visit the Department of Education website at https://studentaid.gov/.

2 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.  It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

3 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.