How to Build Credit: 5 Ways to Increase Your Credit Scores

In case you haven’t noticed, we’re avid proponents of the credit card as an essential credit-building tool.

But that’s not to say credit cards are the only method you should use to establish and build your credit scores.

To the contrary, while we can’t guarantee that a given credit-building method is going to get you the best results, using a combination of tactics responsibly will often benefit your credit scores more than relying entirely on a credit card. That’s because it can contribute to your variety of accounts, which accounts for 10% of your FICO scores.

With that said, let’s dive into some of the best ways to build credit, whether you’re looking to establish credit from scratch or repair severely damaged scores.

Open Your Own Credit Card

Credit cards are exceptionally practical for building credit because there are options available for cardholders in virtually every credit situation. If you have no credit whatsoever, you can stick with a secured card or a student credit card. If you’ve already built fair credit, on the other hand, you may be able to score a decent rewards card that allows you to earn a bit of cash back on things you’d already be buying anyway.

Regardless, once you’ve added a credit card to your wallet, your account activity will generally be reported to the three major credit bureaus — Equifax, Experian, and TransUnion. As you make on-time payments, your credit history will age and expand, and your credit scores should grow in turn.

You just have to make sure you’re using your credit card responsibly at all times. Otherwise, you could do more harm than good, landing yourself in deep debt and racking up negative items on your credit reports, the effects of which can last for years to come.

Pros

• The wide variety of available cards makes it simple to find something that meets your needs.
• If you can get approved for a rewards card, you can build credit while earning points or cash back.
• Many credit cards offer helpful benefits that can may include statement credits, warranty protection, travel insurance, and even airport lounge access, depending on the card.
• Credit cards are useful, versatile payment methods to have on hand.

Cons

• If you haven’t established credit, you may have trouble getting approved for an unsecured credit card.
• Secured cards require you to provide a security deposit up front, which can be an obstacle if you’re strapped for cash.
• Many credit cards charge annual fees, though those designed for individuals with no credit often do not.
• A new credit card account will reduce your average age of accounts if you had any before. This may have a slight negative impact on your credit scores. But that’s true for any account, and you have to start somewhere, so that’s just something to keep in mind.

Tips for Using Credit Cards

• Pay off your statement balance in full by its due date: If you avoid carrying a balance past your card’s statement due date, you can use a credit card without ever accumulating interest charges.
• Only use the card for things you’d already buy anyway: Never make unnecessary purchases just for the sake of building credit. Instead, try using your card for necessities, like groceries or gas, and then paying off those purchases immediately.
• Keep your debt to limit ratio low: The ratio of your combined credit balances to your combined credit limits is known as your credit utilization.
• Avoid applying for too many cards in too short a time: When you apply for a credit card, the issuer will conduct a hard inquiry, which may have an adverse (though temporary) impact on your credit. Packing too many credit inquiries into a short period of time may deal more serious damage to your credit scores, and can prevent you from being approved, even if your scores are still adequate.

Become an Authorized User on Another Credit Card Account

One of the best ways to build credit from nothing is to simply become an authorized user on someone else’s credit card account.

It’s one of the easier credit-building tactics, because it requires virtually no effort on your part. The primary cardholder can add you to his or her account, and then the payment activity for that account will be reported to the major credit bureaus in your name. It’s just a matter of finding someone you trust, because the primary cardholder is entirely liable for the account’s balance. If it’s not used responsibly, it could hurt your credit scores.

There are a few ways you could go about being an authorized user, so talk it over with the primary cardholder to figure out which approach seems best.

One idea is to ask for account access privileges, if the issuer allows it. You can use the card and pay it off promptly to get a better idea of how credit cards work.

Another great option is to simply ask the cardholder to toss the authorized user card, so the account activity appears on your credit reports without you actually having to spend any money.

There may be some requirements you’ll have to meet to be an authorized user, but it shouldn’t involve a credit check, and that’s what makes it useful for building credit.

Pros

• You don’t have to have a credit history to become an authorized user.
• Credit cards offer quick, convenient payments.
• Authorized users often enjoy most of the same perks as the primary cardholder, which can add a lot of value, especially with higher-end cards.

Cons

• You have to have a very strong relationship with whoever’s adding you to the credit card account, as the success of this tactic requires responsible use by both parties.
• You may have to meet some requirements. American Express, for example, won’t let you become an authorized user on someone else’s account if you’ve defaulted on an Amex debt in the past and haven’t paid that debt in full. Plus, certain credit card companies set age requirements, though they usually remain in the low teens with most major issuers.

Tips for Building Credit as an Authorized User

• Be careful who you collaborate with: Don’t try this approach unless you’re 100% confident in the primary cardholder’s ability to pay his or her debts responsibly.
• Know how to remove your authorized user account: You can usually remove your account by contacting the credit card issuer.
• Don’t use the card at all: If you’re struggling financially, this is one of the best ways to build credit. Simply let the primary cardholder use the account as usual, and that positive activity will provide a firm foundation for your blossoming (or rebounding) credit history.

Use a Credit Builder Loan

Like secured credit cards, credit builder loans cater to credit beginners or those looking to repair their credit scores.

They’re quite a bit different than normal loans. Instead of receiving a lump sum of money and then repaying the lender for that amount plus interest, the financial institution puts the agreed-upon loan amount into some sort of account — usually either a savings account or a CD. Then, you make a fixed monthly payment.

Your positive payment activity is reported to the credit bureaus throughout the life of the loan.

After you’ve paid the predetermined credit builder loan amount in full, you’ll get your money back, not including any interest and fees paid.

On top of the interest you pay for your credit builder loan, you’ll usually be charged an administrative or activation fee, as well. But these fees are generally kept quite low and explained clearly ahead of time.

Pros

• You get (most of) your money back.
• Loans can usually be tailored to your budget so you’re not paying more than you can handle.
• Fees are usually low and are fixed monthly, which helps with budgeting.
• Credit builder loans are available through lots of lenders, especially local credit unions, which tend to be pretty flexible.
• Diversifies your variety of credit accounts when used alongside a credit card.

Cons

• There are fees, though they shouldn’t take too much of a toll.
• You could hurt your credit if you make any late payments.
• The success of a credit builder loan relies on your ability to make payments dependably, but that’s the case with nearly any credit-building tactic.

Tips for Building Credit With a Credit Builder Loan

• Shop around: There are several places to get credit builder loans, such as credit unions and online providers, and some may provide better terms than others.
• Create a financial safety net: Consider using the money you get back from the loan to create an emergency fund if you haven’t already.

Get a Personal Loan

Unless you can find a cosigner, we only recommend this method if you’ve already established good credit history. Plus, we only recommend getting a loan if you actually need one to fund a larger purchase, like a car.

On-time loan payments are an excellent way to add to your positive payment history, and adding a personal loan to your credit mix can also have a positive impact on your overall credit scores.

If you can find a cosigner, this may be a plausible opportunity to start building credit if you haven’t already. It’s just a similar situation to the authorized user approach in that your cosigner should be someone you can trust at all costs, like a close family member.

Pros

• If you already need to make a costly purchase, personal loans, such as auto loans, can provide a convenient opportunity to build credit while you’re paying for it.
• Personal loan interest rates are often quite low, particularly if you can find a cosigner with good credit.

Cons

• Interest fees could cost you quite a bit over time.
• A personal loan may only lead to trouble if you’re not certain you can make full, on-time payments.

Tips for Building Credit With a Personal Loan

• Get a cosigner: No credit history? Poor credit scores? Find a trustworthy cosigner who’s willing to help, and this could be a useful credit-building tactic.
• Shop around: As with any loan, you’ll find that different lenders offer different terms.
• Build credit in other ways beforehand: Personal loans are a great next step once you’ve already established your credit scores with a secured credit card and/or credit builder loan.

Add Additional Recurring Payment Types to Your Credit Reports

Certain services, ranging from Experian Boost to RentTrack, will allow you to add rent payments, utility payments, and other recurring expenses to your credit reports.

These payments won’t always be factored into your credit scores, but it may help in some cases.

Pros

• It doesn’t require much effort — you’re already making the payments, after all.

Cons

• Adding recurring payments to your credit reports might not actually help your credit scores that much (or at all).
• Many services that allow you to add recurring payments to your credit reports cost money.
• If you want your rent reported, your landlord will generally have to cooperate to some degree.

Tips for Adding Recurring Payments to Your Credit Reports

• Talk to your landlord first: Your landlord might be willing to report your rent to the credit bureaus to help you avoid having to pay for a reporting service, or may already report it.
• Use Experian Boost: A free service, Experian Boost allows consumers to connect bank accounts to add utility and telecom bill payments to their credit reports. Note that this only impacts your Experian credit report.

So, What’s the Best Way to Build Credit?

Trick question! The best way to build good credit scores will always vary based on your unique financial situation, including your current credit status, your income, and more.

But many people with no credit, bad credit, or thin credit files can benefit from using a variety of credit accounts responsibly.

For example, if you have the cash on hand, consider signing up for a secured credit card and a credit builder loan.

That’ll give you plenty of opportunities to make on-time payments, and the fact that you’re using two different types of credit will help diversify your variety of accounts, which makes up 10% of your FICO scores.

Follow Credit Building Best Practices

No matter how you choose to build credit, it’s essential that you follow credit building best practices for best results. The good news is that most of these rules are pretty simple.

• Always make on-time payments: As the most important factor in the FICO scoring formula, your payment history accounts for 35% of your FICO scores. On-time payments are a must, and late payments are a serious danger to your credit. Consider setting up automatic payments to ensure you’re never past due. And even if you can’t pay off your statement balance in full (which we nearly always recommend, unless you have a card with a 0% introductory APR), always make the minimum payment at the very least.
• Keep utilization low: Credit utilization refers to the ratio of your total amounts owed to your total available credit (revolving credit only). It also accounts for 30% of your FICO scores, so higher utilization will often have a negative impact on your credit scores.
• Don’t close credit cards unless you have to: Your length of credit history makes up 15% of your FICO scores. That means the longer your accounts are active, the better it is for your credit scores. You don’t need to use a credit card regularly to reap the benefits of its age — just don’t close it. You may, however, need to use it every once in a while to ensure it’s not closed automatically.
• Monitor your credit regularly: Keeping on top of your credit scores and credit reports enables you to track your creditworthiness as it changes. It’s also a great way to ensure there are no errors that could be adversely affecting your credit. You can use credit monitoring services or check your credit reports for free annually via AnnualCreditReport.com, and there are plenty of ways to check free credit scores, often including tools provided by your credit card issuer.