Your credit score is one of the main components of your financial health. If your FICO credit score is good, then you can get credit more easily and cheaply than you can if you have several blemishes on your credit report. Fortunately, there are several things that you can do to build your credit over time, regardless of what your credit score is now.
Written by Mark P. Cussen, CFP® , CMFC.
Updated September 17, 2021
Your credit score is one of the main components of your financial health. If your FICO credit score is good, then you can get credit more easily and cheaply than you can if you have several blemishes on your credit report. Fortunately, there are several things that you can do to build your credit over time, regardless of what your credit score is now. Here we will look at 12 tried-and-true ways to build up your credit score so that you can qualify for more credit and loans from lenders and credit card companies at lower interest rates.
(1) Use Your Phone Bill, Utility Bills, and Other Monthly Payments To Build Your Credit History
You can use Experian Boost to have your payment history for all of your monthly utility, cell phone, and streaming service payments reported on your credit history. You will have to connect the bank account you use to make your payments so that the service can scan and find your payments. This will allow more of your on-time payments to show up on your credit report, which helps build your credit score.
If there are any companies that you make regular payments to that aren’t currently being reported to the credit bureaus, you can ask them to start reporting your payments. They are not required to do this, but you have nothing to lose by asking them to. The credit bureaus will accept any information that is reported to them.
(2) Report Your Rent Payments to the Credit Bureaus
Many landlords already report rent payments to the credit bureaus, but be sure to find out whether yours does this. If not, you can ask your landlord to start reporting your rent. They will often be willing to do this, as it takes very little time and does not cost them anything. If your landlord refuses, you can report your rent payments yourself by using a platform like Rental Kharma or LevelCredit. These programs are designed to help you build credit over time, provided you make all of your payments by the due date and have no late or missed payments.
(3) Open a Revolving Credit Account
Revolving credit accounts have a set spending limit that cannot be exceeded. This type of credit can be especially helpful if you use it wisely. Lenders generally like to see consumers use about one-third of their revolving credit every month and then pay it off in full. This shows them you can use your credit wisely and keep up with monthly payments.
There are several different types of revolving accounts. Credit cards are the most common. Charge cards issued by retail stores and lines of credit such as a home equity line of credit are other common types. Businesses may also extend lines of credit to some customers. Once you have paid down the balance on these items, more credit becomes available to you to use in the future. When you run your balance up again and then pay it back down again, it helps you to build credit.
If you don’t have much of a credit history, try to find a credit card that is designed for new users so that you can start building your credit. If all else fails, you can always take out a secured credit card. These cards require you to put down a deposit equal to the credit limit that is extended to you. They are easier to get than unsecured credit cards because they are less risky to lenders. If you miss or are late for a payment, the lender can use your deposit to cover it.
Though secured cards work a little differently than unsecured credit cards, your payments are still reported to the credit bureaus each month, so this can still be an effective credit-building tool. One drawback of these cards is that the interest rates tend to be high, and some also charge monthly or annual fees. Because of this, the best way to use this card is by only spending what you can pay each month. Not maxing out your card will help you avoid paying extra in interest.
If possible, you can also open an unsecured credit card to build or rebuild your credit. But these cards may also charge high interest rates and other fees and charges, so be sure to shop around before choosing a card. There are several websites that can give you a long list of credit card companies that offer credit to people with your credit history, regardless of how bad it may be.
(4) Become an Authorized User
This is probably one of the easiest ways to build good credit. You can ask a friend, family member, or other loved one to add you to their credit card as an authorized user. They don’t have to actually give you a card and you don’t have to make charges. If your name is on the account, the payment history can be reported on your credit file.
Of course, you need to make sure that the main account holder has a stable payment history. If this person makes late payments or fails to make payments at all, it will also hurt your credit history. You also need to make sure that the credit card company reports the card’s monthly activity to the authorized users’ credit file with the credit bureaus for this strategy to do you any good. But this is a very sound strategy overall, as there is no risk to your co-borrower with this approach.
(5) Pay Down Debt To Improve Your Credit Utilization Ratio
As mentioned previously, lenders like to see you use less than your full credit limit each month. Borrowers with high credit scores often pay for everything, including their rent or mortgage, utilities, subscriptions, and groceries on a credit card, and then pay the card off in full every month. This way they can earn additional perks such as airline miles, travel or hotel points, or cashback. For example, a borrower with a credit limit of $10,000 and monthly expenses of $3,000 could run all of their monthly expenses through their credit card and pay off the balance in full every month. Though they are using their credit, paying off the balance allows them to keep their credit utilization ratio at 30%.
What’s a good ratio to aim for? A favorable credit utilization rate is 30% or less. If you really want to boost your credit score,10% or less is ideal. This ratio makes up 30% of your FICO credit score, which is why paying attention to yours can help you strengthen your score.
(6) Don’t Be Late or Miss Your Monthly Payments
This is one of the most critical points to remember when it comes to building credit. Your payment history constitutes 35% of your credit score, which is more than any other single factor. Creditors typically won’t report a late payment to the credit bureaus until it’s at least 30 days past due. Even one late entry on your credit file can significantly lower your credit score. But there are other consequences as well. Being even one day late with your payment could trigger late fees and higher interest rates from the creditor. And several late payments can easily bring your credit score down by 100 points or more. Timely payments are the foundation of building good credit.
(7) Get a Credit-Builder Loan
Although not all financial institutions offer credit-builder loans, many local and regional banks will extend this form of credit to borrowers who do not have good credit. With a credit-builder loan, you deposit funds into a savings account by making monthly payments, plus interest. The lender oversees the account. When the loan is paid off, you are refunded the amount that you deposited. So credit-builder loans also double as a form of savings. The term for most credit-builder loans is typically 6–24 months. Though there is interest, rates are usually less than the rates for conventional personal loans. As with secured credit cards, this is usually because the lender is not taking any risk. Credit-builder loans can help you demonstrate a solid payment history on your credit history, provided you make all of your payments on time and don't default on the loan.
(8) If You Have a Savings Account or Certificate of Deposit, Take Out a Loan Against It
This is similar to a credit-builder loan, except that the lender will simply freeze your funds and use them as a security deposit until your loan is repaid in full. They may unfreeze a portion of your funds with each payment, or they may require payment in full before they will release any of your funds to you. They may also be willing to release a portion of your funds for an additional fee. Your lender will usually be willing to loan you 90%-100% of the value of your account, and the interest rate will usually be lower than it would be for a conventional personal loan.
(9) Take Out a Personal Loan
If you can afford it, you can try to take out a personal loan. While your financial institution may offer one, it’s worth shopping around at local credit unions as well. They may offer lower interest rates. Personal loans are traditional loans where the lender gives you the proceeds upfront. Since there is no collateral backing up the loan, they are unsecured and riskier to the lender. That means the interest rates are higher than they are for secured loans.
It may not be cost-effective to take out a personal loan just to build your credit score. But if you’re already considering one, they are a way to add a stable payment history to your credit file and boost your FICO score. Just make sure that you will be able to make the payment reliably every month so that you do not add additional blemishes to your credit history.
(10) Make Use of Student Loans
Federal student loans are always reported to the credit bureaus, so be sure to make your loan payments on time without fail if you possibly can. If your student loans are subsidized by the federal government, you may be able to consolidate your loans with a new lender or ask for a deferment or forbearance on your loan payments if money becomes tight.
Taking out student loans for the sake of improving your credit is generally not cost-effective, but if you are thinking of going back to school, paying off your student loans with on-time payments can help you to build your credit history and boost your score. You may want to talk to some of the alternative lenders that have sprung up in this area to see what your options are. Just don’t saddle yourself with excessive student loan debt because this can lower your debt-to-utilization ratio and hurt your credit score.
(11) Consider an Auto Loan
Although this may not be the cheapest way to build your credit, like student loans and personal loans, if you’re already considering one, it can help boost your score. Auto loans are reported to the credit bureaus, so making payments on time will help your credit score in the long run. Most dealerships will extend credit to virtually anyone who can demonstrate regular income, so getting a loan shouldn’t be that hard. But the loan will probably come with a high interest rate. To decrease the cost of the loan, try making more than the minimum payment every month.
(12) Keep In Mind That Building Credit Takes Time
There are several ways that you can build a solid credit history. Not every strategy is right for everyone. Assess each and decide which are the right ones for you. While it may be tempting to open a lot of new credit accounts in a short period, this can create a financial burden that prevents you from making your monthly payments on all of them. Faithful and timely payments are the key to having a good credit score. So sometimes one or two methods well employed is all it takes.
You need to be wise in your spending. If you have trouble in this area, it can be a good idea to visit a nonprofit credit counselor to see what strategies you can use to control your spending. Time, patience, and discipline are all necessary to build a good credit score.
There are many things that you can do to raise your credit score. Start by making timely payments, using a good mix of credit (credit cards, student loans, auto loans, rent, or mortgage payments), and using less credit than you have available. Don’t hesitate to enlist the services of a nonprofit credit counselor or qualified financial planner to help you get your credit straightened out. You can pull a copy of your free credit report from each of the major bureaus at www.annualcreditreport.com. You can also get at least one free credit score from other websites such as freecreditreport.com or Experian.com.