Doesn’t matter if you want a new house, get through a tough time, or simply to rent a car—
You won’t be able to get any of these without a stellar credit history.
Back when I was a student, I applied for a cellphone contract for the first time and got declined right there in the store. The sales assistant couldn’t tell me why, but I went home, jumped on Google, and had a look at my credit report. It turned out that my history wasn’t strong enough yet to get a line of credit on a new phone.
Such an everyday thing, and I couldn’t have one. I had to learn how to build credit.
Don’t let this scenario happen to you.
This article will show you:
- How long it takes to build credit.
- How to start building credit…
- …and how to do it if you’re already in debt
- Plus tips on how to build credit with a credit card
It takes months to develop good credit, the nation’s biggest banks and credit card companies agree. However, it can take less than a year to get to a good credit score when you start from nothing. And starting from nothing is what almost 60% of Gen Z have to do, according to the latest Consumer Pulse survey.
Having good credit is all about showing responsibility with your finances. Pay on time, and stick to your budget. That way, you’ll look much more attractive to lenders in the future. Those are two of the main ways to build credit.
The longer the positive track record, the better.
But do you need credit? Having no credit history makes you, and an estimated 26 million fellow Americans, “credit invisible”. This means you’ll have trouble passing a credit check to buy a car, take out a loan, or get that credit card. There’s no easy answer to how to build credit fast, but there are some good ways to start.
How to Start Building Credit
Pay your bills on time
If you’ve got limited credit history, or none, the best way to build credit is to pay your bills on time. Experian, one of the three major credit bureaus in the US, says that late or missed payments stay on your credit report for seven years. That’s seven years of new lenders being able to see that you weren’t careful with your money.
The Consumer Financial Protection Bureau lists on-time payments as its number one way of getting and keeping a good credit score. You might not trust the Government machine, but believe them on that one at least.
How do you do it, though? My tip—keep it simple.
Most banking and credit card apps can give you neat auto-pay features, where the amount due will come straight from your bank account for credit card balances or personal loans.
- set up some reminders,
- circle due dates in your calendar,
- or change the lyrics to Friday I’m in Love.
Anything at all to help you remember when you need to pay a bill. If your main concern is how to build credit from scratch, this is the first step.
Take out a loan (that you can afford)
Another way to prove your creditworthiness is by taking out a loan and repaying it in stable, monthly payments. It can lengthen your history, add something extra to your credit mix, and give you a lump sum to work with in the meantime.
There are a lot of advantages of personal loans (as well as a few disadvantages). One of the most important advantages here is that they can be fairly easy to get, and an unsecured loan won’t require any collateral.
If you’re doing things this way, there are a few things to remember:
It’s a smart idea to save the cash up for your loan in your savings account first. That way, you can make sure the loan is affordable before you take it out. It’s a way to avoid getting yourself into trouble, and it’ll improve your credit.
Before you apply for a loan, shop around.
You’d be surprised how many people don’t do this, with the CFPB finding that three out of four consumers only go to one lender.
You should limit how big your loan is, too.
Only take out what you need, and definitely only what you can afford to repay. That’ll give you the security of knowing you won’t end up hurting your credit with missed payments.
Add alternative data
Think about adding other types of credit you use to the mix. If you rent your home, you can add rental payments to your credit report directly by using systems like Experian’s RentBureau. Rent isn’t something typically considered in your credit history, but it’s a stable, monthly outgoing, so you should take advantage of it if you can.
You can also consider payments like your:
- Netflix, HBO, and other streaming services
- Internet plan
Adding any (or all) of these is a good way to earn credit. You can add your payments for these by using things like Experian Boost.
There’s even the option to have your everyday cash flow considered as part of your overall credit history. FICO, the major US credit scorer, can use your banking activity as a factor in your score. That can give people with blemishes on their record the chance to prove they’re living within their means.
Stick to a budget
This is one of the easiest ways you can improve your credit score. It takes time, and it’s a passive process, but budgeting is a good way to end up with a strong credit history. You’ll avoid debt and make your repayments in full on time.
There are a ton of great ways that you can start a budget that works for you. I know, say the word budget and everyone thinks it’s all baloney sandwiches all the time, but it doesn’t have to be as drastic as that—
By inspecting what you spend now, I’m betting you’ll find some places you can cut back. Look at our free budget spreadsheet that can help you organize your spending.
The key takeaway for your credit is simple. If you don’t overspend, you won’t need as much credit. By reducing your reliance on credit cards and loans, you’ll be a stronger candidate when the time comes to apply for a new line of credit.
You’ll be less likely to miss a payment because you’ve run out of money at the end of the month, and you’ll be able to pay down any outstanding debt with savings. Win, win, win!
A long credit history will look better to lenders and give you a higher credit score. But, you’re likely still wondering how to build credit history. One way is to stop applying for credit.
Seems counterintuitive, right?
Every time you apply for a new credit card or another loan, the average age of your credit history gets a little younger.
If you’re new to credit, there’s no way of avoiding that as you build your history from scratch. On the flip side, if you’ve got a long history already but a lot of new accounts, that’s a signal to anyone looking at your report that you regularly apply for new lines of credit.
That’s why it’s best to keep older accounts open, even if you’re not using them, because they’ll help to lengthen your credit history.
Have a reason for new credit
Don’t stretch yourself to taking out loans or credit cards you can’t afford just to build credit. That’s a surefire way of getting into the Danger Zone for missed payments.
Instead, think about what you need credit for and how you’d use it. Do you want a loan for school? Or do you want to buy a bigger car for the family? Maybe your current credit card isn’t scratching your itch with cashback. There’s no point in applying for a new line of credit without some idea of how you’re going to use it.
To develop your credit further, it might be time to consider cooling it on the ‘apply now’ button.
Keep checking your credit report
If you want to know how to establish credit, this is a vital first step. There’s been a lot of debate around the accuracy of reports, and that means you might suffer if there’s a mistake on yours that doesn’t get fixed.
The good news is that you’re entitled to get a free yearly report on your own credit from each of the major credit bureaus. You can also utilize this website. I highly, highly recommend that you investigate your credit report If you see a mistake, get it fixed as soon as you can. Get in touch with the credit bureau, or the lender and find out what went wrong.
You won’t affect your own credit report by pulling it, but remember whenever a lender looks at your report, this leaves a mark on your history which will likely reduce your credit score even more.
Like the above, you should regularly check your credit score. Your starting credit score isn’t going to be zero, If you have no credit history, it’ll be a blank. That’s okay, there are some ways to improve it quickly.
The credit scorer you’ll have heard most about is FICO, but there are others out there. Finding out how to get your credit score is easy. You can create an account and log in via Credit Karma to view your score for free. If you want to know how to get a credit score, this is the way. There’s even an app that can notify you of any changes to your report. I’d say that’s essential if you’re asking how to start credit.
How to Build Credit if You’re in Debt
There are a few ways that you can start fixing bad credit, but what about if you’re in debt? How long does it take to build credit from nothing?
Don’t worry, we’ve got you covered. Here’s our step-by-step guide on how to establish credit and rebuild your finances while paying off debt.
1. Lock your credit cards away
Might seem like a backwards way to earn credit, but it’s not. If you want to know how to develop a good credit score, the first thing to do is stop spending. Remove your credit cards from online accounts like Amazon, or eBay; anywhere you find yourself impulse buying. You know how in the movies they freeze cards in a block of ice? Do it.
2. Download the debt snowball spreadsheet
Get a handle on your debts and learn how to pay them down strategically.
We believe the debt snowball is the best way to tackle your loans. And, we actually found it so helpful for our readers that we built a comprehensive debt snowball spreadsheet Excel calculator.
Want to set up your debt snowball spreadsheet in just a few minutes? Check out our digital tools on Etsy. Make a small investment, get your instant download, and create a plan to become debt-free today.
One of our users, Redd, had this to say:
“Great product! I can actually breathe a little better after entering all of my information and seeing a light at the end of the tunnel! Great customer service as well! Highly recommend.”
3. Pay your current debts on time
That Debt Snowball spreadsheet might look pretty, but you have to use it too. Depending on what kind of debt you have, there might be different payment priorities. It’s worth working out what debts you should pay down first.
Take it from Derek Sall, financial expert and founder of Life And My Finances:
“Paying debt on time is the best way to improve your credit.”
4. Get your credit utilization below 30%
Credit utilization is the percentage of credit you use at any one time, against the total credit you have available. If you stop using revolving credit (like credit cards where the credit is renewed when the debts are paid off), you can lower your credit utilization.
It’ll bring down your debt, and it’s a good signal to future lenders and credit agencies. If you want to find out how best to pay off your credit card debts and improve your utilization, look at our Credit Card Payoff Spreadsheet to help.
5. Clear up any debts in collections
Having debt in collections can seriously affect your credit. Take a proactive approach. Get in touch with the agencies or lenders that hold your debt and implement a payment plan that you can afford month-to-month. You might even be able to negotiate and pay them off at 25% of the balance, but be sure to get this in writing.
These are made specifically for people rebuilding credit or with no credit history. Think of them as credit builder cards. They work the same way as other credit cards, but with a security deposit. Whatever you spend, you’ll pay back as normal, and if you don’t the balance will come from your deposit.
If you’re able to come up with the money needed for a security deposit, then getting a secured card might be a good way of rebuilding your credit while you work towards being debt free.
A secured card will help you establish credit, and gives you evidence on your report of being financially responsible. Secured credit cards can be the best credit card to build credit, as long as you can afford them.
Interested? There’s a solid credit card, OpenSky® Secured Visa® Card. It’s got a small annual fee, but you can get it without passing a credit check.
7. Take out a credit builder loan
If you have no other options, you could take a credit building loan. This should be your last resort. The Consumer Finance agency found that for people with existing debt, taking out these loans typically resulted in an initial decrease to their credit scores.
If you are going to do it, the main thing you’ll need for a credit builder loan is enough income to make the payments. These loans are a great way for people with no credit, or bad credit to earn some brownie points with lenders.
The bank holds the money you borrow while you make the monthly payments towards it, with these getting reported to at least one of the major credit reporting bureaus. That way, you’re working towards having credit and savings at the same time!
That’s how to build credit without a credit card, but what if you want to use that piece of plastic in your wallet as an extra tool?
If you’re looking for easy ways to build credit, you might wonder how to use a credit card to build credit. We’re way ahead of you!
1. Use it regularly and then pay off the balance in full
There are plenty of wise ways to use your credit card, but because your payment history makes up 35% of your FICO credit score, paying on time is the number one way how to develop a good credit score.
2. Consider a second credit card
Adding another credit card can help you build your credit more quickly, especially if you get them across different providers. That way, more data can be provided to the major credit bureaus, and you can reduce your credit utilization.
Getting a second card can be risky, though. With more credit comes more opportunity for debt. With more than one card, you need money management. It’s not complicated; as long as you pay your bills on time and budget right, you’re halfway there.
3. Get your credit limit increased
This can have a positive impact on your immediate credit score, and over time shows lenders you’re responsible for larger amounts.
4. Become an authorized user on someone else’s card if you can’t get your own
That’s a great way for younger people to earn credit without having to apply for any cards themselves. That’ll only work if the card you’re using reports your spending separately from the main account holder.
Keep in mind that they’ll also be responsible if you screw up and overspend. You don’t want to ruin your own credit, and you definitely don’t want to ruin your parents. Speaking of parents…
Building Credit for Beginners
Building credit while still looking like your yearbook photo can be tough. When you’re fresh out of high school (or maybe still struggling in Spanish class) you don’t have a ton of time, begging the question of how to build credit without a job.
Heading off to college can be a good start. Student loans will impact your credit. Make these payments on time, and you’ll be building credit like George Lucas builds Lego Death Stars.
How to build credit at 18, or 19, without a job or student loans is a bit trickier. You might be able to get a secured card, but it’s not going to be my main recommendation. Becoming an authorized user would be a better bet because you won’t be able to spend more than you can pay back (even with a security deposit).
The answer for how to build credit with no credit at all is to start slow. Before diving into a credit card contract at 18, educate yourself first. To paraphrase Bill Clinton, information and education are everything. Wait… you’ve heard of Clinton, right? Damn, I feel old.
Your Credit—Your Way
Whether you’re starting out, looking to develop your history, or needing to rebuild after debt, there are a ton of great ways to build credit. And there are a few key takeaways that work for everyone:
Pay what you owe, on time, every time.
If you don’t have any yet, this is how to build credit for the first time. Consistency is the biggest factor in developing and maintaining good credit. If you don’t think you’ll be able to keep up with the payments on a credit card or loan, don’t get it. Missed payments will do more damage and take a while to put right.
Work out how to build credit that works with your lifestyle.
If you’re a student, maybe a student loan is the right option. Credit cards can be good for building credit, but you have to accept the risks, too. Credit building loans might be better for you if you want to work towards a bigger goal but don’t need the flexibility of a card month-to-month.
Really, though, there’s no one way to build credit. Think about what you need now, and what you want in the future, and make a plan for how to get between the two.
AUTHOR Tom Quinn
Tom has worked in and around finances for most of his working life, from financial customer service to fraud prevention. He now writes in the personal finance arena, working to demystify money for the world.