At a Glance
Whether you’re just starting out, need to take steps to rebuild your score, or are simply trying to improve your score to get better financial products or interest rates, there are several ways you can build credit and maintain a good credit score. There are also some pitfalls to avoid that will hurt your credit more than help.
In this article, you’ll learn:
- How your credit score is calculated
- What is a good credit score
- Why it is important to have good credit
- How to build credit
- Tips to maintain good credit
- How to rebuild credit if you see a drop
- How long it takes to build credit
- Things you may not know help you build credit
- Things that won’t help you build credit
A credit score is a three-digit number ranging from 300 to 850 that helps predict your credit behavior, including how likely you are to pay back a loan on time. Lenders use your credit score to understand your risk as a borrower and decide whether or not they will offer you a loan, credit card, or other credit products, as well as the interest rate and credit limit you receive.
Higher credit scores make it easier to qualify for a loan and credit and can also help you get a lower interest rate, higher credit limit, and better repayment terms. The lower your score, the riskier you appear to lenders, so you may have a more difficult time qualifying for credit products, and you’ll likely have a higher interest rate if you do.
How is your credit score calculated?
You actually have multiple different credit scores, each calculated differently depending on the scoring model used, the source of data, and even the day it’s calculated. The three credit bureaus that calculate your credit score include Experian, Equifax, and TransUnion.
FICO is the most often used scoring model, and it considers the following:
- Payment history (35% of your score)
- Used vs. available credit or credit utilization (30% of your score)
- Length of credit history (15% of your score)
- Credit mix (10% of your score)
- Credit inquiries (10% of your score)
Learn more: How is Your Credit Score Calculated?
What is a good credit score?
Typically, a good credit score is 690 and above. If you’re just starting out, earning a good credit score can take time. If you’re rebuilding credit, remember negative information won’t stay on your report forever, so don’t get discouraged if your good habits take time to rebound your score.
Also, remember that the higher your score is, the less of a risk you pose to lenders, so you’ll be offered better rates and terms, higher loan amounts, and better overall credit products. This can make every effort to improve your credit score worth it.
Learn more: What is a Good Credit Score?
Why is it important to have good credit?
It’s important to have good credit because your credit score is one of the primary factors lenders consider when deciding whether to approve your loan or credit application. If you have a history of making payments on time, keeping your debt-to-income ratio low, maintaining a long credit history and good credit mix, and ensuring you don’t have too many inquiries, a lender will see you as a less risky borrower.
When you’re at a lower risk, you’ll have access to a greater variety of credit products (some with better perks and benefits). Plus, you’ll be offered better terms, lower interest rates, and higher loan amounts.
Your credit score may also be considered when you apply for a job, try to rent an apartment, or even for insurance purposes. Generally, having good credit indicates you’re financially responsible.
How to build credit?
Whether you’re just starting out building credit, you need to rebuild your credit, or you’re trying to increase your score, there are several ways you can do so:
1. Consider taking out a personal loan
While you should carefully consider the pros and cons of taking out a personal loan, it can be used to help you build and maintain credit. If you qualify, taking out a personal loan can help with your credit mix, which shows lenders how you’re able to handle different types of credit. It also helps you build a positive payment history (as long as you pay on time each month).
If you have a poor credit score, you may not qualify for a good interest rate, so it’s important to weigh the cost of the loan against how much it will help you build credit. Additionally, you should never take out a loan you can’t afford. If you do decide to apply for a personal loan, ensure you read the terms carefully and can make the payments on time and in full.
2. Use a secured credit card
If you’re building your credit score from the ground up, you may want to start with a secured credit card. These cards are backed by a cash deposit you make upfront, typically the same as your credit limit. You can use the card like you would any other to make purchases, and then you’d make your payment on or before the due date and incur interest if you don’t pay the balance in full.
When you close the account or upgrade your card, you receive your deposit back. If you don’t repay the balance, you’ll lose your deposit.
These cards are not meant to be used forever and should really be used as a stepping stone to an unsecured card, which doesn’t require a deposit and has better benefits. That said, they can help you build a credit history and track record of on-time payments, which can significantly bolster your score.
3. Take out a credit-builder loan
A credit-builder loan is a loan specifically designed to help borrowers build credit. Generally, the money you borrow is not released to you but instead held by the lender in an account until the loan is repaid. Your payments are reported to credit bureaus to help you build a payment history. Once the loan is repaid, you’ll get your lump sum (minus interest and fees).
A credit builder loan can be an option if you don’t qualify for traditional loans through a bank or credit union.
Learn more: What is a Credit Builder Loan?
4. Consider a co-signer
You can apply for a loan or unsecured credit card using a co-signer. A co-signer is a trusted friend or family member who helps you apply and get approved for a loan, taking on legal responsibility for paying back the loan should you be unable to do so.
Because they are promising to repay the loan, and their credit score and other factors are also considered, a cosigner can make it easier to get approved for the loan you need.
Related: Personal Loans with a Cosigner
5. Become an authorized user
If you want to start building credit, you may want to ask a family member or significant other if you can become an authorized user of their credit card. This adds that card’s payment history to your credit files, and a positive payment history can make a huge impact on your credit. You don’t have to use the credit card at all to benefit from being an authorized user, but you’ll want to make sure the authorized user activity is reported to the credit bureaus.
If you ask someone to be an authorized user on their card, make sure you discuss and agree on whether and how you’ll use the card and how you’ll pay your share if it is used.
6. Get credit for the bills you pay
Some rent-reporting services, such as Rental Kharma and LevelCredit, can put a bill you’re already paying, such as rent or wireless services, on your credit report. This helps you build a positive history of on-time payments. Not every score will take these payments into account, but it could help establish a credit history for lenders to consider.
Additionally, Experian Boost is a service that enables your rent, cell phone, and utility bills to be reflected in your credit report with Experian. This is only for Experian, though, not the other credit bureaus, but it can still be helpful in building your score.
7. Monitor your credit score and credit report regularly
It’s hard to take steps to improve your score if you don’t know what is having a positive and negative effect, so it’s important to monitor your score and credit report regularly. When doing so, make sure to check for any errors or inaccuracies and dispute any you find. Errors you may find include:
- Incorrect accounts from identity theft
- Closed accounts still reported as open
- Incorrect payment or delinquency dates
- Accounts with incorrect balances or credit limits
- The same debt listed multiple times
Keeping an eye on your report can also help you keep an eye on your progress as your score improves through good financial habits.
Learn more: What is Credit Monitoring?
8. Set up automatic payments
Payment history makes up the largest percentage of your credit score, so it’s important to make all payments on time each month. Setting up automatic payments or scheduling recurring payments ensures payment is made on time every month without you having to remember to make it.
If you do this, make sure you have enough funds in your bank account when the payment is scheduled to avoid an overdraft or declined situation. If you put payments on a credit card, make sure the payments fit into your budget so you can pay off the card each month.
Tips to maintain good credit
Building credit can take time, and maintaining good credit does take some effort. However, there are several ways you can improve and maintain your credit, such as:
1. Make all payments on time. Payment history accounts for the highest percentage of your score, and a late or missed payment can cause a big drop in your score. Set up automatic payments to avoid missing due dates.
2. Pay at least the minimum, but try to pay off credit card balances in full each month. This will help you avoid incurred interest and keep your credit utilization low.
3. Keep credit card utilization low. This is the percentage of credit you use compared to what you have available, and it should be below 30% when possible.
4. Avoid applying for multiple credit accounts close together, such as credit cards or loans. Each application triggers a hard credit inquiry that can cause a small, temporary drop in your score. Multiple applications at once can cause much more damage.
5. Keep credit card accounts open, even if you don’t use them often. Closing an account can increase your credit utilization since it reduces the amount of credit you have available. Additionally, if you close an older account, it can reduce the length of your credit history.
6. Check your credit report often. Ensure there are no errors on your credit report, and keep track of how your score increases or decreases based on your habits.
How to rebuild credit if you see a drop?
No one is perfect, and you may occasionally see a drop in your credit score even if you’re trying to practice good habits. Or, perhaps you missed a payment or closed a credit account, and your score saw a decrease. Regardless of the reason for the drop, there are some things you can do to rebuild your score:
1. Pay all your bills on time
If you can only pay the minimum amount due on your crest cards each month, that’s better than making no payment at all. However, try to pay off as much as you can (ideally, the full amount) each month and make the payment on time.
The amount of time by which you are late also matters. So, even if you miss a payment, make the minimum as soon as you realize it to avoid having it impact your score. The longer past due a payment is, the more significant its impact on your credit score will be.
2. Try maintaining minimal credit utilization
Experts recommend keeping your credit utilization below 30%, but the lower, the better. Check the credit utilization across all of your credit cards and focus on bringing down your balances. Once a lower balance is reported to the credit bureaus consistently, you’ll slowly see an increase in score.
Keeping credit card balances low or at zero and being cautious about closing accounts can also help improve your score. Thankfully, past high credit utilization will not impact your score once you’ve brought balances down.
Learn more: How to Lower Your Credit Utilization Ratio?
3. Get help with your debt
If you have debt you’re struggling to repay, consider seeking help. Options that may help you get out of debt include:
- Credit counseling: A certified credit counselor can help you create a financial plan to better manage your debt.
- Debt management plan: A debt management plan is when a credit counselor helps negotiate lower interest rates and payments with your creditors to eliminate your debt. You will likely have to pay the counselor a fee, which they will then use to pay off your debt.
- Debt consolidation: Think of debt consolidation as refinancing your debt. If you have multiple high-interest debts or credit card balances, you might consolidate them with a debt consolidation loan. Ideally, the debt consolidation loan will have a lower interest rate than your current debts. You can use the loan funds to pay off all of your debt and then work to pay off the loan, simplifying your payments and saving on interest over time.
4. Review your credit report and dispute errors
Reviewing your credit report to check for errors and getting them removed from your report can increase your score. Additionally, it can help you stay on top of your progress and see what has had the most impact on improving your score.
Related: How to Improve Your Credit Score?
How long does it take to build credit?
If you don’t have a credit history, it can take several months to establish a credit score and then even longer to get your score into the “good” or “excellent” range. If you’re just starting out, you’ll need at least one open credit account reported to one of the major credit bureaus for at least six months.
Note that if you have a short or thin credit history or a report with fewer than five accounts, you may still have difficulty getting approved for the most favorable financing terms. Adding credit accounts and making payments over time can help strengthen your credit profile.
Truthfully, it can take several years to build an excellent credit history and score, especially because the length of your credit history holds some weight. However, the sooner you get started, the better.
Learn more: How Long Does it Take to Build Credit?
Things you may not know help you build credit
While these are the most straightforward ways to build credit, you can also build a strong credit history by taking other steps:
1. Lending circles
When you apply for a loan with a Lending Circle and are approved, you’ll join a smaller group of people who need a similar amount of money as you. Each person in the group contributes a small amount of money each month, which funds a loan that gets distributed to one individual. As that person pays back the loan, the payments are reported to the credit bureaus and can help improve credit. Payments go back to the members of the group, so everyone recoups their investment.
The process repeats until all members of the group have received their loan. By the time the last person receives the loan, the first member should be paid up, and by the time the last member is completely paid off, everyone should receive their investment back.
2. Peer-to-peer loans
Peer-to-peer loans allow people to get loans directly from other individuals via a peer-to-peer lending platform, essentially cutting out the financial institution (like a bank or credit union). Participants on the platform can borrow and lend sums of money to others. These loans typically have an easier approval process, but they sometimes have higher interest rates. While on-time payments will help your credit, late or missed payments can hurt your credit.
3. Payments reported by international banks
This option only applies to those who come to the U.S. from another country. Typically, credit built in another country doesn’t count toward your credit when you arrive in the U.S. However, some international banks with a presence in the U.S. offer their members services that do report payments to the U.S. credit bureaus in order to help them establish credit.
4. Keeping old accounts open
Even if you no longer use a credit card, consider keeping the account open. Your credit will benefit from a longer credit history and higher credit limit, while closing the account will shorten the age of your credit and lower your credit limit.
5. Increasing your credit limit
Increasing the credit limit on your credit card(s) can lower your credit utilization rate, which improves your score. However, it’s important that you maintain the same amount of spending with an enhanced limit. If you spend more just because you have access to more, it can have a negative impact rather than a positive impact on your credit history.
Some credit card companies automatically increase your limit after using the card actively (and responsibly) for a certain period of time. However, you can also request a credit limit increase.
Note that sometimes, the creditor may pull your credit history to enhance your limit, which can drop your score temporarily by a few points. However, the long-term benefits of a higher credit limit can outweigh that temporary hit.
Things that don’t help with building credit
On the other hand, there are some things that many people think may help with building credit but don’t. These include:
1. Your income
Your salary isn’t listed on your credit history, so the amount of money you make doesn’t impact your credit score. Your net worth also has no impact on building credit.
However, your income can indirectly impact your credit. For example, your income will help determine whether or not you’re approved for credit. It can also help determine the amount of credit you’re offered, and a higher income can help keep your debt-to-income ratio low, which may increase your chances of approval.
2. Debit cards
Debit and/or prepaid credit card activities are not reported to the credit bureaus, so they don’t help with your credit score. Even though they look, feel, and function similarly to a credit card, you’re using money you already have in your bank account. To impact your credit score, you must show you can handle credit that is extended to you, i.e., through a credit card.
3. Receiving welfare
Government assistance, such as food stamps or disability benefits, do not appear on your credit report and do not impact your score.
4. Paying taxes
Whether you pay your taxes on time or not won’t immediately result in any impact on your credit. However, if you don’t pay your taxes and the IRS reports you as delinquent, they can impose a lien, which can take a serious toll on your credit score.
Paying your bills on time and keeping your credit utilization low are the fastest ways to build up credit. Behavior is reported to the credit bureaus every 30 days, so you can see the impact of your efforts quickly if you take these steps.
Yes, you can build credit without a credit card. You can take out a credit builder loan or personal loan, repay an existing loan or debt, or become an authorized user on another card to build credit. Additionally, you could consider using RentBureau or Experian Boost so that rent and utility payments count toward your credit score.
Utility bills are not typically included in your credit report, so they don’t typically help build a credit history. However, some lenders may use information from utilities to assess your payment history, so it’s important to pay these bills on time. There are also some services you can use to share rental and utility payments with the credit bureaus.
Learn more: Do Utility Bills Build Credit?
If you’ve never taken any form of credit, you likely have no credit score. Getting a FICO credit score requires an account that is at least six months old. After six months of credit reporting, your score will be largely dependent on your payment history and credit utilization up to that point. However, the average credit score for someone in their 20s, who may be new to credit is 660.
Learn more: What Credit Score Do You Start With?
Failing to establish credit at all, making late or missing payments, using too much credit and having a high credit utilization rate, canceling old credit accounts, and not maintaining a mix of different types of credit can all hurt your score. If you can avoid these mistakes, you can build a solid credit history and maintain a good credit score.