The best way to build credit is to open a credit card (preferably one with no annual fee) and use it responsibly. That means paying your bill on time every month and keeping your spending in check so you don’t max out your credit limit.
Building credit from scratch doesn’t have to be difficult, but a clean financial slate is a double-edged sword. You could shed months, or even years, off your credit-building timeline and save thousands of dollars if you make the right moves. Or you could quickly find yourself with bad credit if you act irresponsibly.
Key Things to Know About Building Credit
- To build credit, you need to add positive information to your credit report.
- Just having an open line of credit that is in good standing will add positive information to your credit report and help you build credit.
- One of the easiest ways to build credit is to open a credit card and use it responsibly. You don’t even need to make any purchases.
- You can build credit without a credit card if you do things like get a credit-builder loan and have your on-time rent and utility bill payments reported to the credit bureaus.
- You can start building a credit score in as little as one month.
It’s important to build good credit, as it can help you get low interest rates on credit cards and loans, get approved for an apartment, and even get a job. Taking the following steps will help you keep your credit standing headed in the right direction.
How to Build Credit With a Credit Card
A credit card can help you build credit because your card’s issuer will report your account activity, such as your payment status and the amount of the credit limit that you’re using, to the credit bureaus every month. The credit bureaus will then include that information in your credit reports and generate a credit score for you.
The following tips can help ensure you are using a credit card to put positive information on your credit report.
Become an Authorized User
Becoming an authorized user on a trusted family member’s or friend’s credit card account allows you to start building credit even before you get your own account. As an authorized user, you don’t even need to have access to the credit card to benefit. As long as the primary credit cardholder pays the bills on time, positive information should flow into your credit report and give your credit a boost.
Open the Right Credit Card
We typically recommend seeking out a no-annual-fee credit card intended for people with limited credit or students. If you don’t get approved for either, place a deposit on a no-annual-fee secured credit card, which offers the closest thing to guaranteed approval that you’ll find.
You should choose your first credit card carefully. Plenty of cards have the potential to be more trouble than they’re worth, and blindly applying for credit is counterproductive. Each application results in a hard inquiry into your credit history, which can lead to temporary credit score damage, especially when you apply repeatedly within a short period of time. Your goal should be to apply just once for the card that offers the best terms for your needs and a high likelihood of approval.
Always Pay Your Credit Card Bill on Time
Payment history accounts for up to 40% of your credit score. This doesn’t directly disadvantage credit novices, as the percentage of payments you make on time is what matters most. But mistakes are magnified when you have limited or no credit history. For example, you’re batting just 83% if you’re late with one of your first six monthly credit card payments. But making 599 out of 600 payments on time leaves you with an average over 99%.
There are two ways to improve. One is to keep your spending under control. Spending only what you can afford to repay in full each month on a credit line makes missed payments less likely and encourages responsible credit utilization. The other way is to set up automatic monthly payments from a bank account and schedule them for a few days after your paycheck comes in. This ensures that you’ll have enough money to cover the payment and helps you prioritize bills over unnecessary purchases.
Keep Your Credit Utilization Ratio Low
Your credit utilization ratio is the amount of credit you are using, as of when your account statement is generated each month, compared to your overall credit limit. You should keep your credit utilization ratio below 30% to help your credit score, though the lower you can get it, the better.
To keep your credit utilization ratio low, you will need to avoid spending more than you can afford to pay back and pay more than the minimum monthly payment. You can also pay your bill multiple times per month, to ensure your statement balance (used to calculate utilization) is low.
Maximize Your Available Credit With a Second Credit Card
Once you’ve had your first credit card for at least a year, consider applying for another. Assuming you’ve used that first card responsibly, your credit score should have improved enough for you to qualify for a better deal. Adding another line of credit will also increase your total available credit. That will help your credit utilization ratio and, in turn, your credit score.
Keep Your Credit Card Accounts Open and in Good Standing
The age of your credit history plays a role in determining your credit score, and the longer you keep accounts that are in good standing open, the better it is for your credit score. Even if you don’t use your credit card, you can still build credit with no balance.
If you don’t trust yourself to spend within reason and to always pay your bill by the due date, you’re better off locking your card in a drawer. Just be aware that some credit card issuers will close your account after a long period of inactivity, and make sure you set up autopay for any fees.
Learn more about the best ways to build credit with a credit card.
How to Build Credit Without a Credit Card
A credit card is not the only way to build credit. You can still build credit and show lenders and creditors that you are responsible with money by doing things like getting a loan or having your rent payments reported to the credit bureaus.
Get an Installment Loan
Making on-time payments on a mortgage, auto loan, personal loan, or student loan adds positive information to your credit report and shows lenders that you are responsible with borrowed money. However, it may be difficult to qualify without any credit history. That’s where a credit-builder loan can help.
Try a Credit-Builder Loan
A credit-builder loan is a type of loan designed to help people build their credit without any risk to the lender. With a credit-builder loan, the lender holds the money you are borrowing as you make payments on the loan. Once the loan is paid off, you can access the funds. This gives you an opportunity to demonstrate that you can handle making monthly payments on time and helps you build your credit.
Have Your Rent and Utility Bill Payments Reported to the Credit Bureaus
If you don’t have any credit cards or loans, you can use your on-time rent and utility bill payments to your advantage. Services like Experian Boost, Rent & Bills Reporting from Self, and RentReporters will report your payments for rent or utility bills—or both—to the credit bureaus so they can be factored into your credit score. Your credit can benefit from having these on-time payments included in your credit report.
Learn more about how to build credit without a credit card.
More Tips for Building Credit
Make a Budget to Control Spending
Budgeting is one of the oldest tricks in the book, though not a very popular one. But without a budget, you can easily find yourself overspending or falling behind on savings. Besides, the process doesn’t have to take much time or effort. Budgeting for an hour or two every month will go a long way.
You can easily make a budget on WalletHub, as well as track your spending and analyze your expenses to find ways to save money. You can also check out our best budgeting tips and collection of budget templates.
Build an Emergency Fund
When budgeting, make sure to carve out some room for emergency fund contributions. An emergency fund gives you a financial safety net, which can catch you in the event of job loss or unexpected expenses that could otherwise wreak havoc on your credit. So, aim to save three to six months’ worth of your living expenses in your emergency fund.
Improve Your Credit Mix
The diversity of your credit experience, or your credit mix, accounts for about 10% of your credit score. In other words, having more experience with different types of loans and lines of credit can help your score.
You never want to rush a decision as momentous as buying a car or a house, for example. It takes time to build the credit standing needed for decent rates on a loan, for one thing. But if you’re ready to take out an auto loan or a mortgage, it could benefit your credit score in the long run.
Check Your Credit Report Regularly
Regularly reviewing your credit report is a good habit to develop. But it’s especially important to give it a look early on just to confirm that your biographical information is correct and there are no signs of identity theft. You might even find that you’ve already built a bit of credit – from being an authorized user on a family member’s credit card, for example.
The contents of your major credit reports also serve as the basis for all your credit scores. So, your rating will only ever be as good as your report is. However, you’re unlikely to even have a credit score if you’ve yet to open your first line of credit.
You can check your credit report for free on a weekly basis from all three credit bureaus. You can also get unlimited access to your full TransUnion credit report, updated daily, by signing up for a free WalletHub account.
Sign Up for a Credit Monitoring Service
No one has time to keep an eye on their credit report 24/7. In fact, only about 60% of people have checked their credit report within the last week or month, according to Equifax. But identity theft, financial fraud and credit report errors can rear their ugly heads at any time, and the longer you wait to address them, the worse the symptoms will be for your wallet. That’s what makes credit monitoring so vital.
Many services, including WalletHub, offer free 24/7 credit monitoring. We’ll tell you whenever an important change is made to your TransUnion credit report so you can see if it’s accurate and take steps to fix the problem if it’s not. This can work wonders for your peace of mind, but it’s not a panacea. It simply makes it less likely that an issue — such as overspending or a mistake on your file — will go unnoticed.
Sign Up for Free 24/7 Credit Monitoring
Track Your Credit Score
Significant credit score gains may be measured in months, but fluctuations occur daily. That's why WalletHub offers free credit scores that update every day. Seeing how your credit score changes from day to day will tell you a lot about how the process works and what impact different actions have on your rating. WalletHub’s customized credit analysis will also tell you exactly where you can improve and how to do so.
Get Your Personalized Credit Analysis
By the way, you can and should apply this same principle to your monthly credit card and loan statements. Keeping a close eye on these documents could help you identify inaccurate charges or patterns of overspending.
How Long Does It Take to Build Credit?
You can start building credit in as little as one month after opening a credit account in your name, depending on the credit score model. For instance, VantageScore will calculate a credit score for you within a month of an account appearing on your credit report. FICO, on the other hand, may require you to have up to six months’ worth of activity on your credit account before it generates a credit score.
To build up to excellent or better credit, it may take even longer, as the length of your credit history factors into your credit score. You can learn more about how long it takes to build credit right here on WalletHub.
As you embark on your journey to top WalletFitness®, it’s also helpful to know what not to do. So check out WalletHub’s articles explaining why credit scores drop and the damage that derogatory marks can do.
Ask the Experts: The Building Blocks of Building Credit
In search of more insights into the credit-building process, we posed the following questions to a panel of personal finance experts. Check out their bios and responses below.
- What do you think is the biggest misconception that people have about building credit?
- What is the most common mistake that people make when trying to build credit?
- Do you think it’s easier or harder to build credit now than it was 10 years ago?
- What is the best tip you have for someone trying to build credit from scratch?
Ask the Experts
Financial Capability Specialist, University of Wisconsin-Madison-Financial Education Division of Extension
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Financial Coach at Houston Community College
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Professor of Business and Director of the Master of Science in Health Care Administration and Management Program at Point Park University
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Assistant Professor of Finance, Endowed Professor of Creative Enterprise and Daniels Fund Ethics Fellow in the Anderson School of Management at the University of New Mexico
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Assistant Professor of Accounting at Niagara University and Certified Public Accountant
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Assistant Professor of Accounting in the Harry F. Byrd Jr. School of Business at Shenandoah University
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WalletHub experts are widely quoted. Contact our media team to schedule an interview.