Being on top of your accounts and making smart decisions is key when it comes to improving your credit standing. Building your credit in a smart way can help you achieve your goals — better credit means a less worrisome financial future.
Paying off any high credit card balances you have, checking your credit reports for errors and keeping an eye on your credit utilization rate are all key aspects of building and maintaining good credit.
If you keep your debt low, the ratio of debt to your total credit limit will also stay low. Most importantly, you’ll want to focus a lot of energy on paying your bills on time every month. Here are some of the smartest ways to build credit.
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How to Build Good Credit
First of all, if you don’t have credit, just know that any account you open will need to stay open for six months in order for you to have a credit score (the credit reporting agencies need six months to monitor and report your activity, too).
To begin seeing FICO scores you will need the minimum of six months. However, a VantageScore is more commonly given to those that have very little or no credit history because a VantageScore only requires that you have one month of history.
The VantageScore is a credit score that was developed by the three major credit bureaus: Equifax, Experian, and TransUnion and provide lenders with some insight on a consumer’s creditworthiness and whether they can pay back the money they are borrowing.
As of 2006, the VantageScore has begun competing with FICO scores because while they were based on different scoring ranges initially, they both now follow the 300-850 score range.
VantageScores and FICO scores are broken down into several different categories including payment history, credit age, credit utilization, balances, recent credit applications, and available credit a consumer has. The payment history and the percentage of credit are the two most highly influential elements when it comes to the consumer’s credit score under the VantageScore scoring model. Total balance and recent credit behavior fall into the less influential categories.
Building credit history takes a while when you start from nothing, but the cards and loans we’ll discuss can help you jumpstart the process.
1. Apply for a credit card
Many credit cards for building credit, including secured cards, work well for establishing a solid credit score. Just choose a routine monthly expense, charge it on your credit card and pay the account in full each month. Payment history makes up 35% of your credit score, so making a series of on-time payments can really help your score.
If you don’t believe you will be able to pay that balance in full at the end of the month, then you should reconsider how much you spend on the card.
A secured card is a good option for consumers with no or very little credit and if you need to build credit from scratch. After a year or so of on-time payments, you’ll build enough credit to qualify for an unsecured credit card. (You can go here to learn more about the best-secured credit cards on the market.)
2. Apply for a credit builder loan
Believe it or not, there are loans out there designed specifically for people looking to build credit from scratch or rebuild their credit. (If you’re not sure where your credit stands, you can view your free credit report snapshot on Credit.com. Your credit scores are updated every 14 days, so you can check your progress as you work to build them up.)
An option for building credit the smart way is through a credit builder loan from a credit union. A credit builder loan is an installment loan with terms ranging from 6 to 18 months. Since credit builder loans are reported to one or more of the three national credit reporting agencies, on-time payments for the loan will build up your consumer credit.
It’s a good idea to choose a credit builder loan that reports to the three credit reporting agencies — Equifax, Experian and TransUnion. That way, you’ll see proof of your on-time payments in credit reports from each of these companies.
With a credit builder loan, a lender places the money being borrowed into a savings account on your behalf and you pay off the loan through a series of monthly payments. You get access to the money in the savings account when the loan is paid in full.
So, with a credit builder loan, you build consumer credit, and you build up some (albeit very, very small) savings, too. Loan amounts for credit builder loans may be small, around $500, so you won’t need to struggle to make monthly loan payments.
Just be sure to make those payments on time each month. If you don’t, late or defaulted payments will show up on your credit report. Then you’ll end up hurting the credit you’ve been working so hard to build.
Still not convinced? There are several positive reasons to join a credit union to help build your credit. First, most credit unions offer their customers excellent face-to-face service. With every interaction with their customers, they are looking to ensure the best possible experience for the consumer and make sure that they accomplish what they need to accomplish financially.
Also, there are fewer fees involved with a credit union when compared to a traditional bank account. You may also find substantially lower interest rates on an auto loan or credit card.
3. Become an authorized user
If you’re good at paying on time each month, consider becoming an authorized user on someone else’s unsecured credit card.
You’ll have much more room for spending compared to a secured card, and you’ll have access to this person’s good credit history. If the credit card issuer reports your activity as an authorized user to the credit reporting agencies, you’re golden.
If not, all your efforts to pay on time (or have someone else pay your bills since you aren’t legally required to pay the balance as an authorized user) and “borrow” someone’s credit history are moot.
When you become an authorized user on someone else’s credit card account, you will receive a credit card that is issued in your name, so you are able to use the credit card to make purchases. Because you are just an authorized user, as stated above, you are not legally financially liable to pay the debt because all the responsibility of the credit card falls on the lap of the primary account holder.
For this reason, many are hesitant to extend this offer to people, so it may not be the most beneficial way to go about building your credit. To remove an authorized user from an account, the primary account holder will have to call the credit card issuer and request that the authorized user be removed from the account. It should also be requested that the credit account be removed from the individual’s credit file as well.
If the authorized user remains on your credit report, then you will have to dispute this with each of the three major credit bureaus after the authorized user has been effectively removed from the primary account holder’s credit card.
How Long Does it Take to Build Credit?
Building good credit and improving credit scores in a safe way takes time. Having said that, if you play all your credit cards right, you could establish a solid baseline card after 6 to 12 months of on-time payments. That’s pretty fast, all things considered, and your work doesn’t even have to stop there.
Here are some other steps you can take to build good credit in the long-term:
- Watch your credit utilization. It’s generally recommended that people keep their credit utilization rate below 10%, or at most at 30%, of their total credit limit(s).
- Add a mix of credit accounts over time. Credit scoring models reward you for being able to responsibly manage all types of credit. So, if you’ve mastered the credit card (a revolving line of credit), for example, your score could benefit from an installment loan, like an auto loan. That’s not to say you should go out and buy a car simply in the hopes of bolstering your credit. At the end of the day, you only want to take on financing you need and can actually However, adding a mix of credit accounts organically over time can improve your credit standing.
- Limit credit inquiries. There’s another reason you don’t want to go out and apply for too much credit at once — all those financing applications will generate hard inquiries on your credit report, which can ding your scores and be viewed as a sign of risk when amassed. So be careful to limit and space out loan applications as you work to build your scores.
- Monitor your credit regularly. That’s how you’ll know how you’re doing and what you can work on to improve your scores. It’ll also help you keep an eye out for errors on your credit reports, which are more common than you think. (You can go here to learn how to dispute errors on your credit report.) Remember, you can pull your full credit reports for free each year at AnnualCreditReport.com.
There’s a lot to keep track of, but with some strong focus and planning, you can stay on top of your finances and greatly improve and establish credit. After a year of paying your bills on time, potentially adding a new form of credit and removing any errors from your credit report, your credit could look vastly different.
Know that obtaining a secured credit card or credit builder loan can also greatly increase your potential to build a good credit score in a smart and relatively quick manner.
Keeping your credit up is reassuring because you know that when the time comes to buy a house or car or take out a new loan, you’ll be an excellent candidate.
This article has been updated. It was originally published December 20, 2016.