How to Build Your Credit

Katie McBeth

Trying to understand your credit score doesn’t have to be a daunting task. Being fiscally responsible is rewarding, and once you create healthy spending and credit habits, you’re gold! Here are some easy ways to not only build credit, but create lasting lifestyle changes to continually improve.

Starting from Scratch

Whether you’re brand new to the credit world, or you’ve just filed for bankruptcy and have a clean slate with a low score, there are some easy ways to build credit from the bottom up. You will need to prove your trustworthiness to the credit bureaus, which means your primary goal will be to show you can make payments on time.

  • Get a Loan or Credit Card Cosigner: If you’re looking to apply to small personal loans (about $10,000 or a little more) or credit cards, one of the best options might be to find a cosigner with a high or moderate credit rating. Cosigning with someone who has a better credit rating allows you the chance to piggyback off of their credit standing. This person will be held accountable by the banks to ensure that you are making all your payments on time. If you are late on payments, your credit score won’t be the only one that is hurt. The cosigner could also face penalties, and will be held responsible for any unpaid amount.
  • Open up a Secured Credit Card: Secured credit cards are an easy way to prove to the credit bureaus and your bank that you are able to make scheduled payments. Secured credit cards act very similar to debit cards: you give your bank a deposit, and use the card like any other. As discussed in our previous piece covering secured credit cards: “You will pay a deposit to secure your SCC; this deposit acts as an incentive to keep you on track with your payment while also putting the financial lender at far lower risk. If you’re unable to make payments they can recover delinquent payments using the security deposit you provided.”
  • Become an Authorized User on Another Card: If your parents or your spouse have moderate to good credit, ask them if you can become an authorized user on their credit cards. You will receive your own card in the mail that will allow you to access the account, and you can piggyback off of their good standing to improve your own.
  • Pay Rent on Time, and Report It: If you’re always paying your rent on time, why not take advantage of the good payment history? Services like Rental Karma and Renttrack will send your on-time rental payments to the credit bureaus to help build up your reputation as an on-time payer. Not every credit score will be able to utilize this data, but it could help you improve your chances for a credit card or loan down the road.

However, there are some things you should not do when trying to build your score. For example, do not open a high interest rate credit card, as high interest rates make paying off debt considerably harder. They can also appear risky to the credit bureaus.

Additionally, avoid consolidation services for your loans if you have too many open credit cards that are maxed out. Although consolidation can seem like a great idea, opening up a consolidation account counts as a new “credit line,” which means a hard inquiry will impact your credit score. Hard inquiries are done when new lines of credit are trying to be opened, and having more than one or two of them in a year can appear risky to the credit bureaus.

Plus, if you’re an over spender, leaving those paid-off cards open after consolidating your loans can be a major temptation. It is best to avoid the practice unless you can keep your spending in check.

Keep the Good Habits Rolling

Now that you’ve started to build credit, and your score is improving, it’s time to develop some healthy spending and credit habits to keep the momentum going strong.

  • To start, make sure you are always making credit card and loan payments on time. If your lender agreement allows it, pay back double the minimum payments (if they ask for $25, give them $50) or as much as you can spare over the minimum amount due. This will help pay off the loan faster, and cost you less money in the long run as interest will have a shorter chance to build on the total amount that you owe.
  • Make sure all your bills are being paid on time. Even though your rent and utilities might not be recorded by the credit bureaus, neglecting payments of any sort could end up having your information sent to a collection agency, which will hurt your standing significantly.
  • Once your score has improved, try your best to control your spending. Living outside of your means is one of the most common scenarios for why people go into debt. Also, avoid opening lines of credit all at the same time. This looks risky to the credit bureaus, and hard inquiries will drop your score.
  • Be sure to also keep your credit utilization low. Credit utilization is the ratio of debt owed to credit limit. If you have a $25,000 card limit, don’t breach the halfway mark. Having some debt is also better than having no debt; but having too much debt is dangerous.
  • Finally, check your credit score on a semi-annual basis, but not too often. Credit checks can be seen as “hard inquiries” if done too often, but it is important to know where you stand. It can help you avoid slipping into bad habits, and will also help if your identity is ever stolen.

Building up positive credit doesn’t have to be a chore. Once you find the flow of the game, you’re sure to create positive habits and prove to the banks that you are a financially trustworthy individual.

Want even more tips for improving your credit score, as well as how to read your credit report? Visit our credit score resource and learning center. Are there errors on your credit report bringing down your score? Dispute them with our credit dispute letter templates.

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