How to Build Credit

Establishing a credit score is pivotal in the years leading up to buying a home. It is possible that you could have zero credit if you’ve never opened a credit card or acquired a loan. With zero credit, a lender won’t have any track record about your reliability as a borrower, and may deny you a loan.

If you’re just getting started on your journey to build credit, keep reading.

Exactly what is a credit score?

Your credit score is what lenders use to evaluate your creditworthiness — meaning, how likely you will be to pay back money you borrow, whether you’re buying a house or car or taking out another type of loan. Three separate credit bureaus, Equifax, Experian and Transunion, track your credit history and assign you a score between 300 and 850. The higher your credit score, the better rate and term you’re likely to get when it’s time to borrow money.

Your score is calculated based on a few different factors, each of which make up a certain percentage of your total score. Your payment history makes up 35% of your score. Credit utilization, or how much of your available credit you’re using, makes up another 30%. The length of your overall credit history makes up 15%. Then, your credit mix and recent activity each make up 10% of your score.

How to build credit history

Follow this step-by-step guide if you’re building your credit history from scratch. If you already have an established credit profile and are looking to boost it, read this article about improving your credit.

1. Open a secured credit card

A secured credit card is a great first step in establishing your creditworthiness. With a secured credit card, you put down a cash deposit you can charge against, up to the total deposit amount. Common limits are $200 - $1,000. Then, you make a monthly payment to repay that original deposit amount, freeing up your available credit. This ensures you can’t charge more than you can afford. Best of all, lenders that offer secured credit cards report to the credit bureaus every month, meaning that every on-time payment you make adds to your positive credit history.

Another option is to ask a family member or friend to co-sign on a traditional credit card if you don’t have enough credit to qualify for one on your own. With a traditional credit card, you use it to make purchases as needed, then pay off your charges every month. If you don’t pay off your full balance every month, you’ll be charged interest.

2. Become an authorized user

If you have a friend or family member with great credit, ask if they can add you as an authorized user to one of their credit card accounts. This means you’ll be issued a credit card with your name on it, that is tied to their account. On-time payments made by the main cardholder will show up on your credit report every month, and your credit report will benefit from their long account history. Keep in mind that this tactic will help to establish credit history, but when it comes time to buy a house, your lender may not approve you as a borrower if your score is predominantly relying on someone else’s credit obligations. Therefore, asking to become an authorized user on multiple accounts is not recommended.

3. Keep a low balance

Since credit utilization makes up 30% of your score, it’s important to avoid using a large percentage of your available credit each month. The best way to avoid this is to pay your credit card balance in full every month. Aim to use no more than 30% of your available credit each month, and the lower the better. If you need to, make a couple payments each month to keep your balance low. Keep in mind that your credit utilization is calculated across all your accounts, not just one.

4. Set up automatic bill payments

Most companies that bill customers for services, from home utility companies to cell phone providers, report your payment history to the credit bureaus. This includes both on-time and late payments. To ensure you never miss a payment, set up automatic bill payments for all your monthly bills. This is a fool-proof way to ensure you’re building credit successfully.

5. Request a credit increase

Now that you’ve established credit and you’ve been paying off your balance for a few months, you will want to begin boosting your available credit. To do this, request a credit increase from your existing credit card company before opening a new account. Often, you can get a credit increase without your lender pulling a hard credit inquiry (which can negatively impact your score). Just be sure to ask your credit card company to confirm your score won’t be affected. Increasing your credit limit is the easiest way to reduce your credit utilization ratio without opening any new accounts.

6. Maintain a savings account

Having a healthy savings account or emergency fund can prevent you from having to rely on credit unnecessarily and driving up your utilization ratio. Plus, when it’s time to purchase a house, your lender will ask for a list of assets, including your cash savings.

7. Open a second credit account

Once you’ve established some credit history, think about opening another account to help you diversify your credit. Back-to-back credit inquiries are a red flag to lenders, so don’t open a second account until at least 60 days have passed, that way all credit bureaus have had at least two billing cycles to capture the new account. Your credit score will benefit from having a mix of different types of credit accounts. There are several options for establishing a second credit account.

Get another credit card

When you’re ready to add a second account, getting another credit card can be a fast and easy way to do it. Look for a card with low interest rates and low or no annual fees. Seek out a card that fits your individual needs, whether that’s a student credit card, gas rewards credit card or a card that gives you a certain percentage of your purchases back in cash. Store or retail credit cards can be easy to qualify for with little credit, but they often have higher interest rates.

Consider a credit builder or secured loan

Instead of a credit card, consider a credit-builder loan, or secured loan. Since your credit mix is factored into your score, having a loan in addition to a credit card can be a smart move. Credit builder loans are usually offered by credit unions and community banks. As the name implies, they’re used by people who want to build a strong credit profile. Typically, you set up a monthly payment for a predetermined amount and those funds are moved into a locked savings account. Over the course of six to 24 months, your lender reports your timely payments to the credit bureaus. After your term is up, the lender releases the funds to you, making this type of loan a savings strategy too. A secured loan is similar but you pay a lump sum upfront as a safety deposit, and the lender allows you to borrow the same amount.

Apply for a co-signed loan

Many lenders that offer personal loans allow you to apply with a co-signer–someone with a strong credit profile who will vouch for you. This co-signer agrees to assume responsibility for the loan balance if you can’t or don’t pay.

8. Sign up for free credit reporting tools

Not all of your monthly bills that you pay on time will automatically show up on your credit report. For example, if you pay rent to a landlord or pay for streaming service subscriptions, these do not get reported. However, there are a few free and low-cost credit reporting tools that will allow you to get credit for these on-time payments and boost your score over time. Options include Experian Boost and UltraFico for a wide range of payments and Experian RentBureau specifically for rental payments.

9. Check your credit regularly

It’s not uncommon for there to be errors or fraudulent activity on credit reports. That’s why it’s important to check your credit score regularly, especially if you’re thinking about opening a new loan or credit card. All consumers can get one free credit report annually from AnnualCreditReport.com. Compare reports from each reporting bureau side-by-side and look for differences, errors and other red flags. Also, reflect back on your known payment history. If you notice inconsistencies, request corrections as needed.

You can also sign up for credit monitoring services through your bank or a wide range of apps. They’ll monitor your credit report and notify you of progress, alerts or fraud.

10. Keep your accounts open

Since credit history makes up such a large portion of your credit score (35%), it’s important to avoid closing accounts. Keep credit cards open even if you’re not using them, both to keep your credit history as lengthy as possible and to boost your available credit. If you have credit cards with high fees, ask your credit card company to see if you can upgrade them to better cards once your credit score has improved.

Why is it important to establish credit?

A strong credit history and good credit score play a huge role in your ability to qualify for a mortgage, loan or credit card. They also impact the interest rate you’ll be able to get. An above-average credit score can save you hundreds or even thousands of dollars over the life of a loan.

It can take some time to build and increase your credit score, so it’s important to start early. Then, down the road when you’re ready to prequalify for a home loan, you’ll be able to secure the best possible rate.

How long does it take to build credit?

It can take between three and six months for you to generate enough credit activity in your file that the credit bureaus can calculate a score for you. Most creditors report to the credit bureaus once every 30-45 days. Approximately 35% of your credit score is based on the history of paying your bills on time, which is one reason it takes at least a few months of payments to generate your score.

Here are the steps you should take today to get started building your credit history to enable home buying in the future.

What is the fastest way to start building credit?

The best ways to build credit quickly are to open a secured credit card and get a relative or friend to add you as an authorized user for one of their longest-standing credit accounts. The mix of credit, lengthy history from the authorized user account and timely payments will help you build your credit score as promptly as possible, at least 3 months.