How to Build Your Credit

February 26, 2021
Image of a credit card, sunglasses, and coins on a table

Now more than ever it’s difficult to navigate life without a solid credit history. From applying for a loan to renting an apartment, good credit is a must. If you’re just starting out and lack any form of credit history – or the information on your credit report is mostly negative – the following are ways to help build your credit.

1. Get a secured credit card

When looking for ways to build credit, everyone has to start somewhere. If you’re trying to establish good credit but you can’t get a regular credit card, a secured credit card is a good alternative. A secured credit card is tied to an upfront cash balance, which may be in the form of a savings account. The limit on the card is usually the amount in the account, or at least a portion of it. After that, it operates much like a regular credit card in which you charge responsibly, keep your balance low or at zero, and pay on time. To build the credit you need, however, make sure your lender is reporting your activity to the credit reporting companies. Then find out if your lender will convert the account to a traditional credit card after a period of time.[1]

2. Be an authorized user on a credit card

Another option to help build credit and improve your credit score is to open a joint account with someone who has a good credit history, or become an authorized user on someone else’s account. Parents often help their kids establish credit by adding them as an authorized user on an existing account. It’s important to remember that both parties are responsible for payment and both will be negatively impacted if payments are missed or late.[1]

3. Pay loans on time

The foundation of a good credit history is the ability to make timely payments. If you have a student loan, these loans are reported to the credit bureaus, so be sure to pay them on time – every time. The same is true of auto loans, which are relatively easy to obtain. When purchasing a car, you’ll want to shop around for the best deal. But if you’re just starting out, you may need a co-signer who’s willing to share the responsibility for making payments.[2]

4. Pay bills on time

It’s so important to pay your bills on time. That goes for everything from rent and mortgage to utilities and cell phone bills. Think of it like this: Every on-time payment puts a little feather in your cap with the credit bureau companies. It demonstrates that you can manage your money responsibly. But it’s important to know that not all rental payments and utility bills will end up on your credit report. You can solve that problem by asking your landlord or utility company to report your positive payment history.

5. Consider a credit builder loan

As the name implies, the purpose of a credit builder loan is to establish credit when you don’t already have it. The bank or credit union requires that you deposit a certain amount of money into an interest-bearing account so you can borrow against it. The money stays there until the loan is repaid in full. Just remember that the interest you pay on the loan will be higher than what you earn on the deposit. That’s the price you pay for building your credit history.[1]

6. Get a store credit card

Because store cards often approve applicants who lack credit history, they serve as another relatively easy way to build credit. As a word of caution, however, these cards typically come with a high interest rate, and they can damage your credit if not used responsibly. If a payment is outstanding after 30 days or more, it’s reported to the credit bureaus, resulting in a decrease in your credit score. That’s why you should pay the balance immediately after making a purchase. To ensure you’re actually establishing credit, check to make sure the card issuer is reporting your payment history to the credit bureaus.[3]

7. Increase your credit limit

This is where your credit utilization ratio comes into play. The ratio is a comparison between the total amount of credit available and the total amount being used. A lower utilization ratio means a better credit score. Increasing your available credit can lower your utilization ratio, and that has a positive impact on your credit score. Just be sure not to start charging up to your limit.[1] If you’re already carrying a lot of debt, increasing your credit limit is probably not a good idea. Creditors know that, and they probably won’t authorize an increase as a result. Learn more with these five tips to increase your credit limit.

Why do you need to build credit?

Good credit is necessary for doing many things in life. A higher credit score means you may be able to negotiate lower interest rates on the money you borrow. It may also make it easier to rent an apartment or buy an automobile, keeping in mind that some larger purchases may only be attainable with credit. Finally, it’s good to know you have the resources to pay for unexpected emergencies.

Types of credit

You should be familiar with the four types of consumer credit, including[1] :

  • Revolving credit: This is what’s known as open-ended credit, and credit cards are the most common form. Each month you agree to pay a certain amount of the money you borrowed, but it’s not necessary to pay it all by a certain end date. In fact, you can carry a balance and still borrow more. You will, however, be expected to pay interest on the principal of the unpaid debt.
  • Charge cards: These are similar to credit cards, but they require the borrower to pay the balance in full each month.
  • Service credit: When you agree to pay a certain amount of money to your landlord, mobile phone provider, or utility companies, this is known as service credit. They extend credit to you by providing a service they won’t charge you for until the end of the month. If your payment is late, they will report it to the credit bureaus or to a collection agency.
  • Installment credit: This credit is extended to you when you have a mortgage or car loan. You borrow a specific amount and agree to repay it – along with interest – in installments over a pre-determined period of time.

How do credit scores work?

A credit score is basically a three-digit number, usually between 300 and 850. Your credit score matters because lenders use it to determine how risky it is to lend you money, or how likely you are to repay them. In other words, they want to know how credit-worthy you are. The score is based on the information in your current credit report.

When determining what’s considered a good credit score, keep in mind that credit score ranges vary based on the credit scoring model. But scores from 580 to 669 are generally considered to be fair; scores between 670 and 739 are considered good; and a score of 800 or higher is considered excellent.[1]

The following information can influence your credit score[1] :

  • Your payment history
  • Your credit utilization ratio
  • The types of credit you use
  • The length of your credit history
  • How much current debt you have
  • Any public records, such as bankruptcies
  • The number of credit accounts you’ve applied for, and when

Before you start shopping for a car or other major purchase, you may want to check your credit score and find out how it will affect your interest rate.

Practice building good credit habits

When it comes to building credit and ways to improve your credit score, good spending habits go a long way. This is where a creating a budget comes in handy to make sure you don’t overspend and damage your credit score. Once your credit has been damaged, it takes a long time to repair it. On the other hand, if you develop a long history of managing credit responsibly and making timely payments, you will experience the rewards of being able to borrow money with favorable terms and rates.

Of the many ways to build credit, there’s a good chance a credit card will be part of your plan. Learn to use your credit card responsibly, and it will serve as a helpful tool for building your credit history.


[1]“How to Build Credit” (accessed Nov. 13, 2020).

[2]“10 Ways to Build Credit Without a Credit Card” (September 16, 2020).

[3]“Can Store Credit Cards Build Credit?” (October 20, 2020).


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