How To Build Credit: A Few Good Ways To Get Started

Introduction

Building credit is kind of like building a house. You need to start with a solid foundation, and understanding how credit works can make that foundation stronger. We’ll get into the rest of the house in a few minutes.

But first, let’s talk about why it matters. Your credit profile determines what kind of credit cards you qualify for, and what rates and terms you might be offered on loans. It also could determine how much you’ll pay for auto insurance, where you may be able to live, and even what job you might get.

So knowing how to build credit, how to manage it, and what could make it fall apart are all crucial to your financial future.

What Factors Affect How You Build Credit?

Now we’re ready to talk about building that house of credit. Various things go into calculating credit scores, just like different materials and tools are needed to build a house.

Length of credit history

Having the solid groundwork of credit education is a start, but your credit history becomes part of the foundation over time as well. A strong credit history makes for a more robust credit profile, and that could lead to a higher credit score.

You obviously won’t have a long credit history right out of the gate, but it’s important to establish one as soon as possible. And once you start building that track record, you’ll want to keep it going. Closing older accounts may have a negative impact by shortening your active credit history and reducing the average age of your accounts.

Keeping those older accounts active can help show your long-standing experience with credit, which is an important part of your credit foundation.

New credit applications

Even though a long and positive credit history is a good thing, applying for too many cards to get there can backfire. Each time you apply for new credit, you’ll likely get hard pull on your credit profile — which can lower your credit score a bit.

Applying for a bunch of credit in a short period of time multiplies that impact and adds up to a much bigger ding. It also may paint you as desperate for credit, and that’s usually a red flag for lenders.

As a rule of thumb, applying for new credit is a hard pull — also called a hard inquiry or hard credit check. That will show up on your credit reports for potential lenders to see while negatively impacting your score by a few points.

On the other hand, a soft pull, inquiry or check is informational and not tied directly to credit approval. Soft inquiries are only visible to you on your credit report, and they don’t affect your credit score in any way.

A soft pull happens when you check your own credit score or credit report, and also when you see if you’re pre-qualified for a credit offer. The other way it can happen is when a lender pre-approves you for a credit offer, which is not something you directly control.

Payment history

Moving beyond the foundation, you need a sturdy frame for your credit house. And that comes from a positive payment history. Specifically, on-time payments will help you put up that strong frame. But late or missed payments can weaken the structure, like using warped wood. Then the walls may come crashing down.

Payment history is the most important factor in determining your credit score, so forgetting to pay can destroy your build pretty quickly. Using payment reminders, alerts, calendar entries, or setting up AutoPay can help make sure you don’t end up skipping a due date by mistake.

Credit mix

The materials you use to build out your frame are like your credit mix. Using a variety of materials, like steel and concrete, can make your house stronger.

And likewise, proving you can manage one type of credit is good. But proving you can manage multiple types of credit is even better. A diverse credit mix typically involves at least two types of credit — revolving and installment.

Revolving credit includes credit cards and lines of credit. It’s called revolving because when you pay it down, you can use that credit line again. Installment credit includes loans and mortgages. Once you pay off your agreed-upon installments, those loans are done.

However, credit mix is a nice-to-have more than a must-have. It’s usually not a good idea to go out and start applying for new credit, or take on unnecessary debt, just to diversify your credit mix.

Credit utilization

Once you’ve built your house, you’re not done. What about the utilities, like plumbing and electricity? In credit terms, that aligns with your credit utilization ratio.

This ratio measures the amount of revolving credit you’re currently using, and your credit report includes both individual utilization per card, and aggregate utilization over all your cards. Keeping your balances relatively low helps your financial plumbing flow smoothly without getting clogged.

And “low” does mean low. Most people are surprised when they first hear that experts recommend only using 30% or less of your credit limits. So on a $1,000 credit line, that means not charging more than $300.

It might seem counterintuitive, because it’s natural to assume that your credit is there to use. But your credit utilization is a crucial part of credit score calculation. In fact, it ranks second only to payment history in nearly every credit scoring model.

Monitoring your credit

Alright, so you’ve got your credit house built on a solid foundation, and the utilities are all running smoothly. The only thing left is your routine maintenance and seasonal upkeep, which is like monitoring your credit reports and credit score.

You have three versions of your credit report because three major credit bureaus compile the information reported to them by lenders. Since creditors and lenders can choose which credit bureaus they report to, you should expect each credit report to be slightly different.

Luckily, you can check all of your credit reports for free, and it’s a soft pull that doesn’t affect your credit. The law says you can get a free copy of each credit report every year, but you can now download them each week at AnnualCreditReport.com.

How To Build Credit if You’re Just Getting Started

Now that you know what’s involved in building credit, it might seem almost as overwhelming as building an actual house. But if you’re just starting out, we can keep it simple.

Become an authorized user

If you don’t have your own credit card, you can become an authorized user on someone’s card. If all activity on the account gets reported to the credit bureaus for both the primary account holder and the authorized user, this can still help you establish a credit history.

There’s just a few caveats. Some creditors don’t report authorized users to the bureaus, and others only report it if the authorized user is a spouse. If the activity for both parties is reported but either of you maxes out the card, it can be a negative mark for both of you. And if the primary account holder doesn’t pay on time, you may actually be building a negative credit history.

So if you’re going to be an authorized user, both of you should agree to be responsible with the account. The authorized user isn’t responsible for making payments, so you’re putting a lot of trust in that primary account holder.

Find a cosigner

If you’re starting with a loan instead of a credit card, you may be able to get approved by having someone agree to cosign. That means you’re piggybacking on their good credit for the approval, and they’re responsible if you happen to default on the loan. Because of that, this request is a big deal, and you don’t want to take it lightly.

There used to be a time when you could also use a cosigner on a credit card, but that option is pretty much non-existent among major banks today. A similar arrangement would be a joint account in which you’re both responsible for the card, but that’s becoming less common too.

Get a secured credit card

It can be tough to score an unsecured, or traditional, credit card right out of the gate. But a secured credit card is easier to get because there’s less risk to the card issuer. While unsecured cards are based on your track record and credit score, secured cards are backed by collateral.

More importantly, a secured card can help you build a credit history like any other credit card. It just requires you to make a refundable security deposit, which is usually equal to the credit line.

So if you put down a $200 deposit, that will typically get you a $200 credit line. And then you can charge items to the card and pay them off, which builds your credit profile when the issuer reports that activity to the credit bureaus. And most do, because that’s the whole point of getting a secured credit card.

It might seem like an odd concept at first, because if you have the money, why not just pay cash for purchases? But paying cash doesn’t build credit. On the other hand, secured cards are a tried-and-true way to start building credit if your credit history is currently limited or poor.

Apply for a store credit card

If you don’t want to get a secured card, store credit cards are another option. They can be easier to get than major credit cards because store credit cards typically have lower limits and higher interest rates.

Of course, they can usually only be used with one retailer or group of retailers. For example, you might have a store credit card for your favorite clothing brand. Or you could have one for a specific home improvement chain.

But your purchase and payment activity should still get reported to the credit bureaus, so you can use them to build a credit history. The best way to leverage these cards is to make small purchases, and then pay the card balance off right away so you’re not racking up interest charges.

How To Build Credit After You’ve Been Approved

Once you’ve started successfully getting credit in your name, it might seem like the hard part is over. But it’s actually just beginning. Focusing on positive long-term habits is key to building a solid credit history.

Use your credit card responsibly

A new credit card is exciting, but many people forget that it’s not free money. It’s a tool to build credit and defer payment for purchases, but you don’t want that deferment to get out of control.

A good strategy is to only charge purchases you’ve got the funds for that month. If you pay off your balances during your grace period, you might never get charged interest. Starting out by making small, recurring charges you can easily pay back is one of the fastest routes to building a solid payment history. Think of a streaming subscription or utility bill.

This conservative approach also helps keep your credit utilization ratio low, which is another good practice for your credit journey. Maxing out your credit cards can easily spiral out of control while potentially damaging your credit score in the meantime.

Make payments on time, every time

Paying all your bills on time is one of the best things you can do for your credit. And missing payments is one of the worst.

Creditors typically don’t report a late payment to the credit bureaus until it’s at least 30 days past due, which makes it a missed payment. But if you let it get to that point, each missed payment can stay on your credit report for up to seven years. And that can damage your credit score.

You don’t necessarily have to pay the full balance every time, but it’s important to make at least the minimum payment by the due date each month.

Request a credit line increase strategically

Once you’ve established responsible credit behavior, you might be offered a credit limit increase. If not, you can always request one. Just keep in mind that approval isn’t guaranteed, and it may result in a hard inquiry.

A credit line increase could help decrease your credit utilization ratio if your spending doesn’t increase along with it. And that could help improve your credit score. For example, if you had a $500 credit line with a $200 balance, that’s a 40% credit utilization ratio. A credit line increase to $800 with the same $200 balance lowers your utilization to 25%.

How Long Does It Take To Build Credit?

Establishing and maintaining healthy credit is a long-term process and a lifetime commitment. It doesn’t happen overnight. But you may start to see new activity on your credit profile within a few months of establishing your first account. And credit scores start being generated after three to six months.

In the meantime, you’ll want to monitor your credit reports to make sure everything is accurate. If you see any mistakes, you can dispute the error with the corresponding credit bureau.

Common Mistakes To Avoid When Building Credit

When you’re building credit, avoiding common mistakes is just as important as establishing good behaviors.

Missing payment due dates

As you know, missing payments can cause a lot of damage to your credit. The best way to make sure you pay at least the minimum on time is to use reminders or automatic processes.

A good strategy is setting AutoPay for the minimum amount due each month, and then manually adding a payment or two if you’d like to chip away at your balance. Just keep in mind that some banks have a limit on how many separate payments you can make each month.

Using too much of your available credit

One of the most common mistakes is using up all your available credit and maxing out your cards. High balances hurt your credit utilization and can signal to lenders that you’re having trouble managing debt.

This is one of the quickest ways to damage your credit, and it won’t help you build the positive credit history you’re looking for. Instead, keep your balances manageable, refrain from using more than 30% of each credit line, and pay off the full balances whenever you can.

Carrying a balance you can’t afford

High balances aren’t just about credit utilization. You’ll also typically be charged interest on those balances if you carry them from month to month. Unless you have a good promotional rate, credit card debt is considered high-interest debt.

Applying for too many accounts at once

You might think lowering your credit utilization ratio by opening more accounts is a good idea. But every new application is a hard inquiry on your credit report, which can negatively impact your score a bit.

A better idea is to spread out new applications by six months or more, and only if you need it. This is a situation where slow and steady wins the race.

FAQs About How To Build Credit

Building credit is a complicated process, so let’s address some of the most common questions you might have.

What is the easiest way to start building credit?

When you’re starting from scratch, any credit can put you on the map. You may not qualify for a major credit card right away, so consider becoming an authorized user, getting a store credit card, or applying for a secured card.

Can I build credit without a credit card?

Credit cards are one of the most common ways to get started, but other financial products can work as well. That can include credit-builder loans, debit cards, or other financial accounts created specifically for the purpose of building credit. The key is whether or not account activity gets reported to the credit bureaus. If it does, it may help you build credit.

Does becoming an authorized user help build credit?

In some cases, authorized users can build credit without having their own account. But it depends on the creditor. If they report the activity of both users to the credit bureaus, then it can help. If not, you’re basically invisible. Also consider whether the primary account holder is good with credit, because this type of arrangement could backfire if they’re not.

How much of my credit limit should I use?

The general rule of thumb for building credit is to only use 30% or less of your credit limits. And keeping that ratio in the single digits, under 10%, is even better. This is known as your credit utilization, which refers to how much of your credit lines you actually use.

Do I need to carry a balance to build credit?

No, carrying a balance is not required or recommended. You do need to use your credit card so it doesn’t get closed for inactivity, but paying off your balance each month is a good habit to get into. That can also save you a lot of money in interest charges.

A strategy that could work well is charging one recurring subscription to the card, and setting AutoPay for the full balance. That way you’re establishing positive payment history while barely having to think about it.

How can I build credit responsibly?

The best way to build credit effectively is to be consistent and focus on the things that count most towards your credit score. That includes paying at least the minimum amount due on time, every time. And you’ll also want to keep your balances low, avoid too many applications in a short period of time, and monitor your credit reports and credit scores regularly.

Bottom Line

Building credit can seem like a big undertaking at first glance. But this is a marathon, not a sprint — so patience is key.

If you focus on the things that matter most, like paying on time and keeping balances low, you should find your credit score gradually rising over time. And if you’re looking for a credit card to help you do that, Credit One Bank offers a range of cards for different stages of the credit journey.