How to build credit

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Your credit score has a huge impact on your financial life. If you have good or excellent credit, you’ll benefit from reduced interest rates, better credit card rewards and more opportunities to use credit to build a strong financial foundation.

If you have poor credit, you might have trouble taking out a credit card, renting an apartment or even finding a job—and if you are accepted for a line of credit, you’ll pay much higher interest rates on your debt.

This is why understanding how to build credit is so important. Without credit, lenders can’t gauge how reliable you are at paying bills, which is why having no credit history can be just as bad as having bad credit. Everyone should learn how to build credit, whether you want to apply for some of the best credit cards on the market or if you simply want to live without the baggage of a bad credit history.

The good news is that building credit isn’t hard. There are many ways to build credit, so let’s take a look at some of the best tips, tricks and strategies to help you improve your credit history and increase your credit score.

How to build credit

Banks like to see that you can manage your money. Here’s a step-by-step guide to help you start developing a positive credit history.

Become an authorized user

Becoming an authorized user on someone else’s credit account is a fast way to add information to your credit history. As an authorized user, you’ll be able to piggyback on someone else’s credit—which can be both a benefit and a challenge.

If the person who has authorized you on their account uses credit responsibly, their good credit can help you boost your own credit history and score. However, if they have a negative credit history or begin treating their credit accounts irresponsibly, you might want to remove yourself as an authorized user as any poor credit habits can affect your record, too.

Before you become an authorized user on a credit card, check to see whether the lender reports authorized user data to the three major credit bureaus (Equifax, Experian and TransUnion). Not all lenders report authorized users to the credit bureaus, so make sure you’re becoming an authorized user on an account that can actually help your credit.

Make your rent and utility payments count

If you don’t have a credit card of your own yet—or if you want to build your credit without credit cards—it’s time to leverage the power of your other monthly bills. If you rent, ask your property management company if it reports your payments to Experian RentBureau. If it doesn’t, you can sign up for a rent payment service that works in partnership with RentBureau and have your rental payment history reported. There are many ways to report your rent to the credit bureaus, so try to take advantage of at least one of them.

You might also want to consider signing up for Experian Boost, a service that helps you boost your credit score by tracking your phone and utility payments. If you pay those bills on time every month, you could see an instant improvement in your FICO score. Read Bankrate’s guide to Experian Boost to learn more.

Sign up for the right type of credit card

When you’re ready to start building credit with a credit card, make sure you apply for the right type of card. If you’re trying to build credit as a college student, consider one of the top credit cards for students. If you have a car, fuel expenses are already a part of your spending—and gas credit cards help you use those purchases as a foundation for building credit.

You could even build your credit score with a store credit card. Retail credit cards often come with high interest rates, but they’re available to people with less-than-perfect credit. That makes store cards a good starting point for people who want to improve their credit history.

If your credit score is very low or your credit history is limited, you might want to consider applying for a secured credit card. Secured cards require a deposit to obtain a line of credit. For example, a $500 credit limit typically requires a $500 deposit. Having to pay for a line of credit might seem like a hassle, but it’s an easy way to obtain credit in your own name. Once you build up a history of responsible use, most secured cards will return your deposit—and the best secured cards will also increase your credit limit, giving your credit score another boost.

Set up automatic credit card payments

One of the best ways to ensure you always pay your credit card bills on time is to sign up for automatic credit card payments. You can set up an automatic minimum payment, automatically pay the full statement balance or choose a fixed amount to put towards your credit cards every month. You’ll need to make sure there’s enough money in your bank account to cover your automatic payments, of course. But if you can get autopay set up on your credit card bills, you’ll be able to reap the benefit of a positive credit payment history without having to manually schedule payments each month.

Open a second credit card

Once you’ve built up a positive credit history with your first credit card, it’s time to apply for a second credit card. Having multiple credit cards under your name increases the amount of credit available to you—and if you can avoid running up high balances on your credit cards, you could lower your credit utilization ratio (which represents your your current debt as a percentage of your available credit) and improve your credit score.

Plus, having more than one credit card gives you the opportunity to earn different credit card rewards. You might want a travel credit card and a cash back credit card, for example, or a card that rewards groceries and a card that rewards dining out.

Request a credit limit increase

One of the easiest ways to increase your credit score is by increasing your credit limit. If you request a credit limit increase on your existing credit cards, you might be able to get a slightly higher line of credit on each card. That extra credit can help your credit score grow, as long as you don’t turn your new credit into debt.

Take out a personal loan

After you’ve been using credit cards for a while and making responsible on-time payments, you should have enough credit history to qualify for a small personal loan. Although this isn’t a quick fix—personal loans usually take six to 12 months to raise your credit score—it can diversify the types of credit on your credit report, and you can use your loan to prove you can consistently make payments on time.

How are credit scores calculated?

What goes into a credit score? More than you might realize. The FICO credit scoring model uses the following five factors to calculate your credit score:

Payment history: 35 percent of your credit score is based on your payment record. Pay your bills on time every month to avoid lowering your newly established credit score.

Credit utilization: 30 percent of your credit score is based on how much of your available credit you’re currently using—and less credit utilization is better. If you rack up debt or carry high balances, your credit score will suffer.

Length of credit history: 15 percent of your credit score is based on length of credit history, which includes the age of your oldest credit account, the age of your newest account and the average age of all your accounts. This is why it’s a good idea to keep old credit cards open, even when you’re no longer using them regularly.

Credit mix: 10 percent of your credit score is based on the types of credit accounts under your name. Having both revolving accounts, such as credit cards, and installment accounts, such as car loans, can give your credit score a bump. But you can still build and maintain a good credit score even if you only have credit cards.

Recent credit inquiries: 10 percent of your credit score comes from new credit. This includes the number of credit inquiries on your account. Each hard credit pull lowers your credit score slightly, so try to avoid applying for a lot of new credit over a short period of time.

Want to build credit fast? Practice good credit habits

While you’re establishing credit it’s important to know how to build a positive credit history. Having a good credit score opens the door to lower interest rates and better opportunities for loans and credit in the future. Here are some good credit habits that can help you build credit more quickly:

Pay bills on time: Since your payment history makes up 35 percent of your credit score, it’s important to pay your bills on time. If you accidentally miss a payment, contact your credit card issuer and make up the payment before it is 30 days past due.

Monitor your credit report: Keep a watchful eye on your credit report so you can monitor your financial habits and dispute any errors you find. It’s also a good idea to keep track of your credit score—there are many ways you can check your credit score for free.

Keep an eye on utilization: To boost your credit score as quickly as possible, try to keep your balances below 30 percent of your available credit. If you have a credit card with a $1,000 credit limit, for example, that means keeping any revolving balance below $300—and it’s even better if you can pay your balance off in full every month.

Don’t apply for too many new credit accounts at once: Applying for multiple credit accounts at once isn’t always a good idea. Not only will the back-to-back credit inquiries lower your credit score, but lenders might also turn you down simply because you’ve applied for too many credit cards within a short period of time.

Avoid unnecessary credit inquiries: If you’re considering a new credit card, try not to waste credit inquiries on applications that aren’t likely to be accepted. Instead, look for credit options designed for people with your credit history and background.

Keep old credit accounts open: Try to use each of your credit cards at least once per year, to prevent lenders from closing your accounts due to inactivity. If you have an old credit card that charges an annual fee, consider downgrading your card to one with no annual fee—that way, you can keep the line of credit open and continue to build your credit history.

Bottom line

Building your credit takes time, but the process often goes more quickly than people realize. If you start applying these credit-building tips and strategies today, you could see an improvement in your credit score within months. Continue to practice responsible credit habits, and you can look forward to higher credit limits, lower interest rates, better credit card rewards and all of the other financial benefits that come with building good credit.