Approximately 45 million Americans have no credit history, according to the US Government Accountability Office. Credit scores impact numerous aspects of our financial lives, from securing a mortgage or car loan to obtaining favorable interest rates on credit cards. This guide explores practical steps and strategies to help you build credit from scratch and pave the way for a stronger financial future.
Understanding your credit score before building credit
Before you build credit, it’s essential to grasp the fundamental aspects of your credit score. FICO 8 and 9 are the two most commonly used credit scoring models. Five categories make up your FICO credit score:
- Payment history 35% — Factors in on-time, late and missed payments.
- Amounts owed 30% — Factors in owed balances on your active accounts.
- Length of credit history 15% — Factors in the ages of your active accounts.
- New credit 10% — Factors in how often you apply for new credit.
- Credit mix 10% — Factors in the different types of active accounts you have.
7 ways to build credit
Here are seven tactics you can use to start building your credit score.
1. Pay all your bills on time
The simplest and most effective way to build credit is paying everything on time — credit card minimum payments, auto loans, student loans, house payments and everything in between.
When you apply for new credit, a lender is most concerned with your ability to repay a loan on time — so your payment history is the most important factor in determining your credit score. If multiple late payments are reported, it’s
likely doing major damage. One late payment can damage your credit score by as much as 100 points, depending on your current credit history and score.
This also applies to accounts that aren’t being reported to the credit bureaus, such as your utility bills, rent and phone bill. Even though those personal accounts aren’t normally reported, if you’re late on a utility bill, there’s a possibility
that the utility company could report the late payment.
Managing your student loans
On average, students have a total of $34,000 in student debt
, and that amount is climbing each year. If your student loans are left unchecked, they can drastically lower your
If you can manage it, set up a repayment plan with your student loan service provider or consider refinancing options. By paying your student loans, you can earn a positive repayment
history. Once they’re paid off, you may see a temporary reduction in your credit score, but it’s likely to rebound into a much higher score.
Expert tip: Consider autopay to manage your bills easier
Setting up automatic payments on consistent bills, such as rent, your car loan or phone bill, can help you keep track of all your bills, maintain a positive payment history and relieve the stress of having to remember all your due dates.
But fluctuating bills aren't recommended for autopay. For example, if you have your electric bill on autopay and the bill is higher than normal, you could get hit with an overdraft fee with your bank or risk the transaction not going through if you don't have enough money to cover it.
— Bethany Hickey, Writer, Banking and Loans
2. Get a credit card
Even if you don’t use the credit card, having one can help build credit. If you only have installment loans on your credit reports, your credit mix is lacking, so adding a revolving credit account like a credit card can help — but
only if you manage it well.
Paying your credit card balances off each month can help build a positive payment history and keep your credit utilization low, which plays into your amounts owed. Aim to keep your credit card balances under 30% of their credit
limit. Any higher than that can be a sign that you’re overextended financially and could bring your credit score down.
3. Become an authorized user
If you can’t qualify for a credit card on your own, consider becoming an authorized user. An authorized user is someone who gets added to an existing credit card account. You can benefit from adding a new account to your credit reports, start to gain
from the payment history and likely get your own card to use if the primary account holder allows it.
Younger borrowers are most often added to their parents’ or guardians’ credit cards as authorized users to build credit. But you could ask your spouse, trusted friend or family member to add you.
Just keep in mind that if you become an authorized user, your credit reports may be at the mercy of the primary account holder. If they make late payments or have a high balance on the credit card, it could negatively impact your credit score.
4. Get a secured credit card
If a traditional credit card or becoming an authorized user isn’t your speed, there’s a safer option. A secured credit card works like a traditional credit
card, except they’re secured by a deposit. When you open the account, you make an opening deposit that also sets your credit limit.
Other than the deposit, they work the same as traditional credit cards in that you’re charged interest on balances that aren’t repaid by the cycle’s end, and you gain payment history from paying off the card. And if you can’t repay
the card’s balance, the deposit you made when you opened the card repays it once the account is closed.
Some popular secured credit cards include the Current Build Card, the Varo Believe Secured Card and the Chime Credit Builder Card.
5. Get a car loan
If you need a car, an auto loan is great for building credit for multiple reasons. And often, a car loan is the first type of loan someone takes out.
Auto loans typically offer a long repayment history that you can benefit from with timely payments, and it can add to the average age of your credit history over time. Adding an installment loan benefits your
credit mix if you don’t already have any active installment loans.
Auto loans are secured by the vehicle you’re financing, so they’re typically much easier to qualify for compared to unsecured loans like personal loans. Just keep in mind that if you can’t
repay the car loan, you could risk getting the car repossessed, which not only ruins your week but can also lower your credit score.
6. Get a credit-building loan
Credit building loans can be thought of as a savings account that you’re obligated to add to each month. They’re often easier to qualify for compared to costly personal loans or other borrowing methods, since they’re designed for no-credit borrowers.
A credit building loan isn’t a “loan” in the traditional sense, in that you don’t actually get the funds right away. The lender sets aside the amount you apply for, and you repay the lender in installments until you’ve “repaid” the amount. Over the
term, you gain payment history and add an account to your credit reports. Once the term is over, you get access to the funds.
7. Check your credit score for errors
While you’re taking action to build credit, you should also review your credit report regularly — at least once a year. Normally, you’re entitled to a free copy of your credit reports every 12 months, and right now, Equifax, Experian and TransUnion
are offering free weekly credit report copies.
You can request copies of your credit reports from AnnualCreditReport.com, or from the credit bureaus themselves. Once you have your report, read through them carefully and look for any errors that could be negatively affecting your
score. If you find any errors, dispute it with the credit bureau that reported it to get it removed.
Keep an eye out for:
- Incorrect personal information, such as wrong SSN or date of birth
- Inaccurate loan balances
- Negative marks that don’t belong, such as inaccurately reported payments
- Accounts in collections that are inaccurate
- Signs of identity theft, like accounts you didn’t open
How long does it take to build credit?
It’s likely not the answer you want to hear, but building a good credit history can take months or even years — but it depends on where you’re starting out.
If you’re a no-credit borrower with no credit history at all, it’s likely you have a credit score around 500 to 600. Adding some accounts to your credit reports and making timely payments
could mean reaching the 700s in a matter of months.
However, if you have poor credit from negative marks, such as multiple late payments or defaulted loans, it’ll take some time to heal. Most negative marks stop impacting your credit score after seven years, but with each passing year, the impact they
With a very poor credit score below 500, it may take a few years to get back in the green by making timely payments, keeping credit card balances low and only applying for new credit when you need it.
What’s considered a good credit score?
A good credit score is considered anything above 670, according to FICO. The average credit score in the US is 714, based on data from FICO and Experian.
A credit score between 725 to 759 is considered “very good,” and anything above 760 is considered “excellent.” If you have a credit score below 670, some lenders may consider you a poor credit borrower, making it tough to qualify for new credit or
get the best interest rates in the market.
How to build a perfect credit score
Compare accounts with credit-building features
Compare these popular credit-building accounts by their maintenance fee, minimum deposit to open and APY.
Just because you have less-than-ideal credit doesn’t mean you’re out of the running for new credit when you need it. If you don’t have time for credit repair and need to borrow soon, a variety of borrowing products cater to low credit scores.