Credit cards aren’t the only way to establish and improve your credit score.
To the contrary, while we can’t guarantee that any particular credit-building strategy will yield the best results, it’s generally agreed that combining strategies benefit your credit scores more than relying solely on credit cards.
With that said, here are five of the best ways to build credit, whether you’re starting from scratch or repairing severely damaged scores:
- Get a personal loan
- Open your credit card
- Use a credit builder loan
- Become an authorized user
- Report rent payments
Discover how each credit-building approach works.
1 Get a personal loan
Personal loans can certainly help you improve your credit score. However, unless you have a good credit history, it can be difficult to qualify for a personal loan with a reasonable interest rate.
Furthermore, we only recommend taking out a loan if you really need it to fund a large purchase, such as a car. Applying for a personal loan solely to build credit is generally a bad idea.
However, if you truly need a loan, making on-time loan payments is a great way to build a positive payment history on your credit reports. Adding a personal loan (also known as an installment account) to your credit mix, like credit builder loans, may positively impact your overall credit scores, depending on your current credit mix.
The size of your personal loan, like credit builder loans (which are also installment loans), has little impact on credit building.
How can I build credit with a personal loan?
- Shop around: As with any loan, different lenders offer different terms.
- Build credit in other ways first: Personal loans are an excellent next step after establishing your credit with a secured credit card and/or credit builder loan.
2 Open your credit card
Credit cards can be extremely useful for credit building because they provide options for cardholders in virtually every credit situation.
You can use a secured or student credit card if you have no credit. If you’ve already established good credit, you might be able to get a decent rewards card that allows you to earn points or cash back on purchases you’d make anyway.
Once you’ve added a credit card to your wallet, your account activity will be reported to the three major credit bureaus — Equifax®, ExperianTM, and TransUnion®. Your credit history will age and expand as you make on-time payments, and your credit scores should rise as a result.
The key to success is to make sure you always use your credit card responsibly. Otherwise, you may end up doing more harm than good. The consequences can last for years if you get into deep credit card debt or accumulate negative items on your credit reports. Read; Importance of Personal Financial Planning
3 Use a credit builder loan
Credit builder loans, like secured credit cards, are designed for people who are new to credit or want to improve their credit.
They differ significantly from traditional loans. Instead of receiving a lump sum of money and then repaying the lender for that amount plus interest, the financial institution makes you a loan. Still, it deposits the funds into an account, usually a savings account or a CD. The lender then receives a fixed monthly payment from you.
Throughout the life of the loan, your positive payment activity is reported to credit bureaus.
Take note that the size of your credit builder loan is unimportant for credit building. In general, your payment history and the amount of the loan you’ve paid off are the most important factors here.
After you’ve paid off the credit builder loan in full, you’ll have access to the funds as well as any interest they earned while sitting in savings. Of course, any interest or fees paid to the lender will not be reimbursed.
In addition to the interest on your credit builder loan, you will usually be charged an administrative or activation fee. However, these fees are generally kept to a minimum and are clearly stated ahead of time.
How can I build credit with a credit builder loan?
- Shop around: Credit unions and online lenders are two options for credit builder loans, and some may offer better terms than others.
- Create a financial safety net: Consider reinvesting the loan proceeds in your emergency fund.
4 Become an authorized user
Another way to start building your credit is to become an authorized user on an existing credit card account. An authorized user has permission to use someone else’s credit card. However, adding an authorized user to your credit card has risks, so be cautious when using this option to build credit.
When you become an authorized user on someone else’s card, your authorized user activity is reported to the credit bureaus. The authorized user’s credit report will include information about the credit card account, such as the credit limit, credit utilization, and payment history. This arrangement benefits not only the authorized user but also the original cardholder. Any rewards or cash back earned by an authorized user will be credited to the primary cardholder’s account.
However, if credit is not managed wisely by both the primary cardholder and the authorized user, both credit scores may suffer. The primary user is stuck with the bill if the authorized user recklessly exceeds their spending limit. This can lead to missed payments, increased credit utilization, and being stuck with a high APR payment, all of which have a negative impact on credit. On the other hand, if the primary cardholder is forgetful and frequently misses payments, the authorized user’s credit history will suffer.
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5 Report rent payments
Another way to start building credit is to report your rent payments. While rent payments are typically not reported on your credit report, Experian provides a service that allows you to do so through the Experian RentBureau. Eligible renters can have their payments reported through this service in order to improve their payment history. Experian Boost will also assist you in earning credit for on-time utility, streaming, and phone payments. Your credit score will improve over time as your on-time payment history grows.
The Best Way To Build Credit
The best way to build good credit will always depend on your individual financial situation, including your current credit status, income, and other factors.
However, many people with no credit, bad credit, or thin credit files can benefit from responsibly using a variety of credit accounts. Consider signing up for a secured credit card and a credit builder loan, for example, if you have the cash on hand.
This will provide you with plenty of opportunities to make on-time payments, and the fact that you’re using two different types of credit will help diversify your account mix, which accounts for 10% of your FICO® Scores.
What are the best credit-building practices?
If you want to see good results, no matter how you choose to build credit, it’s critical that you follow credit-building best practices. The majority of these rules are straightforward.
- Maintain a low credit utilization: Credit utilization is the ratio of your total amounts owed to your total available credit (credit cards only). It also accounts for approximately 30% of your FICO® Scores, so higher utilization will frequently have a negative impact on your credit scores.
- Regularly monitor your credit: Keeping track of your credit scores and reports allows you to track your creditworthiness as it changes. It’s also a great way to ensure there are no errors that could harm your credit. Credit monitoring services are available, as is a free annual credit report from AnnualCreditReport.com. There are numerous ways to obtain free credit scores, including tools provided by your credit card company.
- Always make on-time payments: Your payment history accounts for 35% of your FICO® Scores as the most important factor in the FICO® scoring formula. On-time payments are required, and late payments endanger your credit. Consider setting up automatic payments to avoid falling behind. Even if you are unable to pay off your statement balance in full (which we almost always recommend unless you have a card with a 0% introductory APR), always make the minimum payment.
- Close credit cards only when absolutely necessary: When you close a credit card, you may inadvertently raise your credit report’s overall credit card utilization ratio. Your credit scores may suffer an immediate drop as a result of this. You may also be setting yourself up for future issues because closed, positive accounts are removed from your credit reports after 10 years. Once the account is removed from your credit (in about a decade), it may reduce the length of your credit history, which is worth 15% of your FICO® Scores. You may also need to use your credit card every now and then to keep it from being closed automatically.
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FAQs
What can I buy to build my credit?
The best purchases to build credit are everyday necessities that can be charged to credit cards and larger purchases such as houses and cars that contribute to monthly credit reporting. Anything you buy with a credit card or loan eventually helps you build credit as long as you pay on time.
What is the credit loophole?
“The 609 loophole is a section of the Fair Credit Reporting Act that states that if something on your credit report is incorrect, you have the right to dispute it in writing.”
What’s the highest credit score?
A credit score ranges from 300 to 850, a numerical rating that assesses a person’s ability to repay a debt. A higher credit score indicates that a borrower is less risky and more likely to pay on time.
How long does it take to build credit?
The Takeaway. It usually takes six months to generate your first credit score. Establishing good or excellent credit takes longer.
