How to Build Your Credit: A Step-by-Step Guide

Credit: it can be hard to understand, and even harder to build, especially if you’re not sure where to start. As a homeowner, good credit can be crucial for just about every decision connected to your home, from qualifying for a mortgage or equity financing to securing insurance. If your credit — or lack thereof — is keeping you from taking advantage of opportunities, there are ways to improve it. We’ll start with the basics, then dive into the best strategies for growing and maintaining your credit.

Here are the topics you'll find below:

• Understanding Ways to Build Credit
• Key Components of Credit Scores
• Building Credit from Scratch
• Strategies for Managing Credit Card Balances
• Fast-Track Your Credit Score Improvement
• How to Build Credit Without a Credit Card
• Frequently Asked Questions About Credit

Understanding Ways to Build Credit

Before you take steps to establish or improve your credit, it’s important to understand the fundamentals.

What Is Credit and How Does It Work?

Credit is a number, ranging from 300-850, that represents your ability to borrow money under the agreement that you’ll repay the debt later (often with interest attached). When referring to a consumer, credit can speak to their creditworthiness or history. If you have good credit, this tells lenders you have a solid history of repaying your balances. Your credit “track record” is expressed as what’s called a credit score.

Importance of a Good Credit Score

Your credit score is a prediction of your credit behavior based on your past behavior (or lack thereof), including how likely you are to pay a loan back on time, and lenders typically require this as part of their application and approval criteria. For this reason and others, it’s important to establish and maintain a good credit score.

Key Components of Credit Scores

There are a handful of components that contribute to your credit score. These include:

• Your payment history. This refers to whether you’ve paid your past credit cards on time, as lenders look to determine the amount of risk they’ll be taking on when they provide funding.
• Amounts owed. While having outstanding credit balances isn’t always a negative thing, if you’re using a lot of your available credit and have multiple unpaid balances, this can put you at higher risk of defaulting in a lender’s eyes. This is measured by what’s called a credit utilization ratio (we’ll talk more about this later).
• Length of credit history. You don’t necessarily need a long credit history to have a good credit score, but it certainly helps to have a well-established record — even if it’s only for one or two credit cards.
• Credit mix. Again, while it’s not necessary to have a huge variety of credit accounts, lenders will consider your mix of revolving accounts like credit cards, and installment debts such as mortgages and car loans.
• New credit - If you’re looking to build a solid credit foundation, it’s wise to avoid opening too many new credit accounts in a short amount of time, as it increases your risk in the eyes of lenders.

Getting Started: Building Credit from Scratch

So, you don’t have any credit and aren’t sure of the first step to take. The good news is you have a couple options! Let’s look at the two most common ones.

Secured Credit Cards: A Beginner’s Tool

Secured credit cards are a special type of credit card that requires a cash deposit from you upon opening the account in order to cover the lender in the case of missed payments. The primary advantage of these cards is that you often don’t need any credit history in order to qualify as long as you provide the security deposit, which allows you to begin building credit.

Credit-builder Loans

Credit-builder loans are a specific type of loan in which your money is held in an account as collateral after you borrow a small amount and make monthly payments. Once you repay the amount, you get the money back. This way, the lender minimizes risk while allowing you to grow your credit history. While you don’t need credit to qualify, you’ll need to show that you have enough income to cover the payments.

Strategies for Managing Credit Card Balances

There are a number of ways to effectively manage your credit card balances. In addition to making payments on time, which we’ll discuss below, it can help to try and pay more than the minimum payment each month, maintain a low credit utilization ratio, create and stick to a monthly budget, and regularly review your credit card statement.

Understanding Credit Utilization Ratio

Usually expressed as a percentage, your credit utilization ratio represents the amount of revolving credit you’re utilizing divided by the total credit available to you. This is calculated using only your revolving credit accounts (credit cards you hold or of which you are an authorized user, HELOCs, and personal lines of credit). In general, maintaining a low utilization ratio — ideally, under 30% — can help improve your score.

Importance of On-time Payments

One of the most important ways to maintain and improve your credit score is to make your payments on time — set a reminder if you need to, as this simple step can go a long way toward boosting your credit score. (It will also save you from paying late fees!).

Fast-Track Your Credit Score Improvement

Tips to Quickly Raise Your Credit Score

While there’s no guaranteed way to grow your credit score quickly, there are some steps you can take that could increase your likelihood of boosting it. These include:

• Making on-time payments
• Paying down revolving account balances
• Limiting your amount of new credit applications
• Keeping your oldest account open to boost your credit history
• Staying under your credit limit
• Diversifying the types of credit you have

How to Build Credit Without a Credit Card

Similar to the ways to handle a lack of credit history, there are steps you can take to build credit if you don’t have a credit card.

Become an authorized user

Do you have a family member or friend with good credit? If they’re willing, they can add you to their credit card account as an authorized user. Once this is reported to credit bureaus, your credit history will include this account.

Earn credit for on-time rent, utility or streaming service payments

In some cases, you can connect your rent, utility, cell phone, or streaming service accounts to the Experian credit bureau through something called Experian Boost, and on-time payments can help you build your credit without a card.

Techniques for Maintaining a Good Credit History

The same practices we’ve covered for boosting your credit are important for maintaining a good credit history, too. These practices include:

• Making on-time payments
• Staying well under your credit limit
• Only applying for credit that you need
• Regularly checking your statements for errors

Common Challenges and How to Overcome Them

Building and maintaining credit can be a long, sometimes frustrating process — but there are some things to keep in mind that might make the experience less stressful and speed up your progress.

Mistakes to Avoid When Building Credit

There are some pitfalls to avoid when building your credit. These include:

• Making late payments
• Only making minimum payments
• Opening too many new credit accounts

What to Do If You Have No Credit History

Everybody has to start somewhere, and there are a handful of different strategies to handle a lack of credit history. We’ve discussed these above, but here’s a recap of some of the most common approaches:

• Become an authorized user
• Earn credit for on-time rent, utility or streaming service payments
• Apply for a secured credit card
• Take out a credit-builder loan

Rebuilding Credit: The Fastest Strategies

If you have less-than-stellar credit, there are ways to turn things around. By taking the established steps for building and maintaining good credit — prioritizing on-time payments, staying well under your credit limit, and limiting new credit applications, plus being consistent with these good habits — you can increase your chances of having a credit score you can be proud of.

Frequently-asked Questions

How often should I check my credit score?

It’s generally a good idea to review your credit score at least once a year, though some might want to do so more often — say, every six months — to keep an eye on how and if it’s changing. You can check your score from each of the three bureaus for free once per year.

How can I start building credit?

One way to begin building credit is to take out a credit card and prioritize on-time payments every month. These small steps can help you to establish a solid credit history without overextending yourself.

What builds credit score the fastest?

Unfortunately, there’s no guaranteed way to quickly build your credit score. However, making consistent, on-time payments is one of the best strategies for building and maintaining a good credit score, along with the best practice we discussed above.

What is the 15-3 rule for credit score?

The “15-3 rule” refers to a credit card payoff strategy that advises that instead of making one payment per month, you make two payments: the first, 15 days before your statement date, and the second, three days before the statement is due in order to raise your credit score. While this approach has gained some traction, it has not been proven to definitively improve your credit score.

When can you start building credit?

Technically speaking, you can start building credit when you turn 18 — but in terms of establishing a solid credit history, it can take at least six months after opening your first credit card to receive your first credit score.

How long does it take to build a 700 credit score?

The time it takes for you to build your credit score depends on a number of factors, but it can generally take between five and ten years to reach a good-to-very good credit score of 700-750. However, you can increase your likelihood of building a favorable credit score by following the advice above and ensuring you make regular on-time payments for any cards you have.