Building your credit score can be challenging if you have a negative credit history or none at all. But making the effort could save you thousands of dollars in fees and interest when you apply for a loan or credit card. Some strategies begin to improve your credit immediately, while others take more time.
The more steps you take to build your credit, the better success you’re likely to have. Consider the following and implement the ones that make the most sense for your situation.
Credit cards are one of the best tools to help you build credit. Each month that you make on-time monthly payments builds a positive payment history for your credit profile and can increase your credit score.
If you don’t have any credit history, you may not get approved for an unsecured credit card right away. Instead, apply for a secured credit card. Secured credit cards require an upfront deposit ranging from $50 to $300, which serves as your initial credit limit, but you can deposit more.
Just like a regular credit card, you can make purchases and borrow up to your credit limit, and you’ll need to pay a monthly minimum payment. Those payments get reported to the three major credit bureaus — Experian, TransUnion, and Equifax — so it’s crucial to pay on time. Some secured credit cards even allow you to increase your credit limit or may upgrade your account to an unsecured card after a few months of managing your account wisely.
An authorized user is added to a credit card owner’s account and gets their own card to make purchases with. If you have a relative or close friend with good credit, ask if they’ll let you become an authorized user on one of their credit cards. Your authorized user account may be added to your credit report, which can help build your credit if you manage your card spending and make payments on time.
Bear in mind that this is a big responsibility — if you can’t pay for what you’ve charged, you’ll hurt their credit as well as yours.
Sometimes utility bills, cellphone bills, and other bills can help boost your credit score when added to your credit report. Experian Boost is a service that allows you to increase your credit score for free by adding your payment history for regular monthly bills, including your rent.
LevelCredit by Self also helps you add your rent, cellphone bill, and utility payments to your credit report to increase your score. With LevelCredit, you can add around two years of past payments for a fee, while Experian Boost is free.
eCredable is another third-party company you can use to add utility payments to your credit report, also for a fee. eCredable reports to TransUnion.
In addition to getting a credit card, you can also try a credit-builder loan, especially if you want to establish your credit history with a no-credit-history loan. A credit-builder loan allows you to “borrow” a small amount of money, usually around $300 to $1,000, for credit reporting purposes only. You don’t access or use the money until you’ve paid it back in full. Your monthly payments get reported to credit reporting agencies to help boost your score.
Some banks and credit unions may offer credit-builder loans, along with other third-party companies like Self.
Tip: Alternately, you could apply for a personal loan with a cosigner to build your credit through timely payments. You could even use such a loan to consolidate your current debt and pay a lower interest rate overall.
Once you get a credit card or loan, be sure to make on-time payments each month. Missing a payment could result in a late fee and hurt your score. Payment history usually accounts for around 35% of your credit score, so it’s an important factor.
Set up automatic monthly payments to ensure you always make payments on time. Some lenders discount the interest rate for setting up autopay as well.
If you have a credit card and have made on-time payments, you can request a credit limit increase. A credit limit increase can help raise your credit score — since it reduces your credit utilization ratio (which makes up about 30% of your FICO score) — so long as you manage your spending.
You can request a credit limit increase online or by calling the number on the back of your card. Just make sure you’ve been keeping your card balance low and making payments on time to improve your chances of getting approved for a credit limit increase.
Your credit utilization is an important factor that impacts your credit score. Credit utilization is how much credit you’ve used relative to how much you have available. A good rule of thumb is to keep your total credit utilization ratio below 30%. This means if your credit card limit is $1,000, your balance should be below $300.
It also helps to pay your card balance off in full each month to avoid interest fees increasing your balance (and increasing your credit utilization). Especially avoid maxing out your cards, as this can cause your credit score to increase.
Even though you want to build credit, avoid applying for too many credit products at once. Doing this will increase the number of credit inquiries you have in a short period of time, which could negatively impact your score.
Hard credit inquiries usually stay on your credit report for up to two years. However, if you’re prescreened by a credit card company and receive an offer, this will result in a soft credit pull that does not go on your credit report.
You can get quick gains in your credit score with some of the options above. But practicing healthy habits such as paying your bills on time and keeping balances low is the best way to increase and maintain a high credit score over time.