It’s been a difficult time for everyone. But coming into the new year, many have found the past twelve months have landed them with lower credit scores than ever before. This can damage not only your financial reputation, but also your prospects. So, what’s the effect of a high or low credit score, and how can you improve yours?
Why Is a Good Credit Score Important?
It’s like a digital record of financial viability, which is reflected in a credit score. Purchases made using credit cards and monthly debt repayments boost your score. A low credit score makes borrowing money, securing credit cards with good interest rates, or qualifying for a mortgage difficult. Conversely, maintaining a good credit score can:
Increase loan amounts available
Lower interest rates on loans
Increase the probability of loan acceptance
Provide access to buy now, pay later credit offers
Boosting Your Score Is Easy
Knowing everything about your credit score is important. So, you must check it whenever possible to see where you can give it a boost. Let’s discuss eight easy ways to improve your credit score In 2021.
#1 – Know Your Score with a Free Credit Report
To improve your credit score, you need to know what it is. There’s plenty of companies out there that can give you a free credit report card, such as TransUnion, Equifax, and Experian. Most of these provide paid services to keep on top of changes. If you have the spare income to subscribe, it can significantly help your credit score. Keep reading to find out how.
With companies like Experian, you are entitled to one report free annually. And you may even be eligible for another if you’ve recently been refused a loan or employment based on a poor credit score.
#2 – Check If Your Report Is Accurate
Identity theft and credit fraud are rife these days. Once you have your report, take the time to review your accounts and dispute any you know aren’t right. Even if you don’t get lost money back, having false debts removed from your credit report can boost your score.
#3 – Pay Your Bills on Time
Perhaps the most frequent cause of lowered credit scores is late payments. To give your credit a boost, make sure to pay any bills and loan repayments on time. Using direct debits is a reliable way to make sure payments reach their destinations on time. And monthly reminders on your phone or work computer can help if you’d rather not automate your payments.
#4 – Open a Secured Credit Card
The main benefit to get this card is that you’re more than likely to get approved if you don’t have stellar credit. You’ll need to make a deposit upfront. And they often don’t require a credit check to apply. Another huge benefit is you’re going to build your credit just like any normal credit card would, if the issuer reports to the credit bureaus. When choosing any credit card to help boost your credit, make sure they report to the bureaus before applying.
#5 – Get a Credit-Builder Loan
To get a credit-builder loan, you don’t need to have a good credit score. You just need to prove that you have enough income to make the payments.
You regularly can’t get to the cash until you have completely reimbursed the advance, which implies you can work on your savings and your credit simultaneously.
#6 – Check Your Credit Report for Errors
The first thing to do is to look at your Credit Report. Second, You can get one from each of the major bureaus. You’re entitled to a free copy every 12 months. Once you receive these, pay detailed attention to any errors such as an incorrect address, the spelling of your name, open accounts being reported as closed, outdated information, and many more. Check here for more information.
#7 – Get a Credit Card, and Request More Credit
Spending credit is the best way to earn better credit. So, look for a credit card that fits your needs. You can use it for predictable expenses you can pay off as soon as you get paid. Simply using the card and paying it off at the start of every month shows you can use credit responsibly, which should allow you to request more credit to use and improve your debt ratio, which also affects your credit score. These things can help boost your credits score effortlessly.
#8 – Patience Is a virtue
Repairing your credit score won’t be fast or without hurdles. Take your time to think through all your financial choices, limit your access to new credit avenues unless they fit into your overall credit goals, and keep on top of payments. It may take months for the results to show, but once they do, it’ll be worth it. Hang in there!
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Learning how to build credit can help if you have a bad credit score or want to improve your current score. You can start by getting a secured credit card, becoming an authorized user, or getting a cosigner on a loan.
If you have bad credit due to derogatory marks, those marks can stay on your credit report for up to seven to ten years, depending on the type of mark. A low credit score leads to higher interest rates, larger deposits, and a low approval rate for loans and lines of credit. Those just beginning to build their credit will have similar challenges, but there are ways to build or work to repair your credit score.
By learning ways to build credit, you will not only improve your financial health, but it can reduce your stress around finances as well. In this article, we go over 12 tips that can help regardless of your specific credit situation.
Table of contents:
Get Added as an Authorized User
Try a Secured Credit Card
Find a Cosigner
Report Utilities and Bills
Get a Credit-Builder Loan
Pay Your Bills on Time
Regularly Check Your Credit Scores and Reports
Dispute Errors on Your Credit Report
Pay Off Collections
Open New Lines of Credit
Request a Credit Limit Increase
Have a Good Credit Mix
1. Get Added as an Authorized User
Becoming an authorized user is one of the most popular ways to build your credit score because you benefit from someone else’s good, established credit history. Also known as “piggybacking,” becoming an authorized user is when someone adds you to their credit card account.
The odds of approval on a credit application are lower if you have a low or bad credit score, so this is a way to start building credit and improve your ability to get your own card later. When you’re an authorized user, the card company will also report the payment history for your credit report when the primary account holder uses and makes payments on their credit card.
You can have a friend or family member add you as an authorized user. While this can be a great way to build credit, it’s useful to know that this can also negatively affect your or the other person’s credit should either of you miss payments or over utilize the credit line.
2. Try a Secured Credit Card
A secured credit card is a type of credit card that most people can acquire through their bank regardless of their credit score. The primary challenge of getting a credit card with a low credit score is that your credit score is one of the wayslenders evaluate risk. If you don’t have a credit history to show that you know how to manage credit or have derogatory marks on your report, credit card companies may be reluctant to loan you money via a credit card.
Secured credit cards are different because rather than borrowing from a financial institution, you borrow from yourself. You do this by depositing money into the credit card account, which becomes your credit limit. For example, if you opened a secured credit card with a $500 deposit, you will have a $500 credit limit. As you use the card and make regular payments, these will be reported to the credit bureaus to help build your credit history and potentially help improve your score.
3. Find a Cosigner
Similar to becoming an authorized user, you can benefit from a cosigner with a good credit score. On your own, you may not receive approval on a personal loan or car loan. When you have a cosigner with a good credit score, the lender sees loaning to you as less of a risk because the cosigner is also attached to the loan.
Although a cosigner can help with the loan approval process, like becoming an authorized user, your credit can also affect that of your cosigner, so it’s important to make full and on-time payments.
4. Report Utilities and Bills
When learning how to build credit, many people don’t realize that most utilities and bills are not reported to the three major credit bureaus. Fortunately, you can purchase services that will report your utilities and bills. Services like Credit.com’s ExtraCredit® subscription help build credit history for people with no credit history or low credit scores.
5. Get a Credit-Builder Loan
Credit-builder loans do just what you think they do—they are loans that help you build credit. Unlike typical loans, where you fill out an application and receive the funds, credit-builder loans are a sort of savings program. When a bank or financial institution provides you with a credit-builder loan, the funds go into an account, and you make payments on the amount. As you make your payments, the lender reports them to the credit bureaus to help build credit history and potentially improve your score with your on-time payments.
Many credit-building programs have higher interest rates than traditional loans due to the higher risk, but they can help your score in the long term. Once you pay the credit-builder loan off with interest, you receive the full loan amount.
6. Pay Your Bills on Time
If you already have lines of credit or loans, paying your bills on time is one of the best ways to continue building your credit score. Your payment history is 35% of your FICO® credit score, which is why paying your bills on time is helpful.
One of the best ways to ensure you never miss a payment is to set up automatic payments for the minimum amount on your credit cards and bills. You can always make additional payments, but when the money comes out of your bank account automatically, you no longer have to worry about forgetting a payment.
7. Regularly Check Your Credit Scores and Reports
A great habit for building credit or trying to maintain a good credit score is to check your credit score and report regularly. Unlike a car experiencing mechanical issues, there are no warning lights or alarms that go off when your credit score drops or a negative mark appears on your report.
Checking your scores and reports lets you know if there are any issues sooner rather than later. It can also help you stay motivated as you work to build your score as you see the number start to rise.
Although your credit report doesn’t notify you about changes automatically, Credit.com’s ExtraCredit® offers credit monitoring as part of the subscription service. Credit.com also offers a free service whereyou also get your free credit report card to analyze your current score for issues that need your attention.
8. Dispute Errors on Your Credit Report
If you regularly check your credit score and credit report, you may find errors. Sometimes, bill and credit card companies don’t properly report your payments, which can hurt your credit. Credit card fraud and identity theft are also more common than you may think, and this can also cause your credit score to drop. Should you find errors on your credit report, it’s your right to challenge them. To file a formal dispute, you need to write a dispute letter showing documentation of payments and other information to the creditor reporting the error. If you have other potential errors, you can request a verification of the reporting from the credit bureaus. They will investigate then respond with the results, typically within 30 to 45 days.
9. Pay Off Collections
As you now know, derogatory marks on your credit report can have a negative impact on your credit score. When someone doesn’t pay their bills, the account becomes delinquent and a collection agency could buy it. You can find the information about the collection agency on your credit report and then contact them to pay off the debt.
In some cases, a collection agency will let you settle the debt for a fraction of what you owe. When you agree to pay off or settle the debt, you can ask for a pay-for-delete letter. After you pay off a collection agency, the derogatory mark can stay on your credit report for years. A pay-for-delete letter is an agreement that the collection agency will have the collection item removed from your report once you pay it. Get this agreement in writing!
Before negotiating with a collection agency, it’s helpful to also know your debt collection rights.
10. Open New Lines of Credit
For those with an established credit score, a good way to continue improving your credit score is to open new lines of credit. In addition to your payment history, credit utilization is the second-most important factor for your credit score. Your credit utilization is worth 30% of your FICO credit score, and new lines of credit can help keep your utilization low as long as you don’t use them.
Credit utilization is the amount you owe compared to your overall credit limit, and ideally, your utilization should be under 30%. For example, if you have five credit cards with a combined $5,000 credit limit and owe $2,500, your utilization is at 50%. If you open up a new line of credit for an additional $5,000, raising your total limit to $10,000, your utilization is now only 25% if you owe $2,500.
11. Request a Credit Limit Increase
If you don’t want to open new lines of credit but still want to build your credit, you can request a credit increase from your credit card company. This accomplishes the same thing with regard to credit utilization as opening new lines of credit. If you have a good payment history with your credit card company, they are more likely to increase your credit limit, lowering your utilization rate.
12. Have a Good Credit Mix
Your credit mix shows that you can handle multiple types of credit. The two primary credit types are installment and revolving credit. Revolving credit is a line of credit that allows you to spend up to the credit limit, make payments, and then use the credit again. Some common forms of revolving credit include:
Credit cards
Personal lines of credit
Home equity lines of credit (HELOC)
Installment loans are lines of credit that give you an amount you pay down to $0 over time, and then the account closes. Examples of installment loans include:
Auto loans
Home loans
Student loans
Personal loans
Check Your Credit and Start Building It Today
Checking and monitoring your credit scores and credit reports is the key to building your credit and maintaining a positive score. As you continue to build your credit, you may begin to save money on interest rates and have additional financial freedom as you can access more opportunities.
If you want to begin your credit-building journey, Credit.com’s ExtraCredit subscription offers credit monitoring, bill reporting, personalized credit and loan recommendations, and more. You can also access your free credit score and free credit report card through Credit.com today.
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Many people with good credit scores own at least one credit card, with 82% of all credit card holders boasting credit scores of 680 and higher.
When used responsibly, credit cards can be a great tool for building credit. Here’s a complete guide on how to build credit with a credit card.
Table of contents:
5 Best Ways to Build Credit with a Credit Card
To improve your credit score with a credit card, you need to know how to best use your credit card. Responsible credit card usage is key to boosting your credit—it won’t increase simply because you got a credit card. Here are the five best ways to increase your credit score using a credit card.
1. Pay bills on time
One of the most important parts of having a credit card is paying your credit card bill on time. Payment history is the largest factor in your FICO® score at 35%, which means it can make or break your score.
Get into the habit of paying your bills on time every month and watch your score grow. Setting up automatic payments for a few days before your bill is due can help make sure you never miss a payment and give a cushion of time for the payment to go through.
2. Keep your utilization rate low
Your credit utilization rate, or credit utilization ratio, is the amount of credit you’re using divided by the amount of credit available to you (your credit limit).
Let’s say your credit limit is $500. This is the maximum amount you can spend on your credit card before payments are denied, but that doesn’t mean you should spend that much.
It’s best for your credit score to keep your utilization rate under 30%—under 10% is even better! This is because the amount of money you owe impacts 30% of your FICO score and the lower this number is, the better. But how much can you actually spend with your credit card?
If your credit limit is $500, 30% of that is $150. So, you should aim to never have a balance over $150 on your credit card. Even better, shoot for a balance under $50 (10% of your limit).
3. Don’t overspend
You don’t need to carry a balance on your credit card to improve your credit score. Paying off your balance in full every time, not just making the minimum payment, is the best practice.
Carrying a balance can cost you more in credit card interest and late fees. Plus, it may increase your utilization rate and damage your credit score. Do your best to avoid credit card debt and treat your credit card like a debit card—only spending money you have.
4. Use your card regularly
Using your first credit card requires a delicate balance. You don’t want to spend too much and go over your utilization rate, but if you don’t use it regularly enough, the lender may close your account. Using some of your available credit is one of the best ways to boost your credit.
The solution is to use your card to make regular, small purchases. This could include purchases like:
Gas
Groceries
Small, recurring bills
Inexpensive meals
After a while of making these regular purchases and paying them off on time, your credit card provider will probably increase your credit limit, allowing you to spend more with your card. Until then, using your card for these types of purchases can help you establish responsible credit card habits and keep your credit utilization low.
5. Avoid opening more cards
Every time you apply for a new credit card, the creditor makes a hard inquiry on your credit, which drops your credit score a few points. You’ll be able to earn back those points in the long run, but in most cases, if you apply to a bunch of credit cards at once, those hard inquiries will add up and take a toll on your credit.
For this reason, you should only apply for one credit card at a time and make sure it’s a good match for you. When you’re first building your credit, it’s best to start small with one card and take your time to practice building credit with it before opening more accounts.
How to Use Credit Cards to Start Building Credit
To recap, here’s a step-by-step guide to increasing your credit score with your first credit card.
Apply for a credit card you can qualify for.
Connect your bank account for automatic monthly payments.
Make small purchases to use under 30% of your credit limit (under 10% is better).
Pay your balance in full and on time each month.
Avoid opening new credit cards.
Regularly monitor your credit report.
If you’re not sure what kind of credit card to apply for, here are the types of credit cards you can use to start building credit and the advantages of each.
Unsecured credit card: An unsecured credit card, or standard credit card, is great if you qualify for one. They don’t require a deposit to use and often offer rewards.
Secured credit card: This type of card is great if you can’t get approved for a standard credit card. Secured cards require a deposit but then they work like any other credit card.
Student credit card: If you’re a student, it’s typically easier to qualify for a student card than a standard credit card. These cards can have decent rewards too!
Store credit card: Store credit cards can sometimes be easier to qualify for than standard cards. Be sure to choose one for a store you shop at often or can be used at other places besides the specific store.
Authorized user for a credit card: A family member or friend can add you as an authorized user on their credit card. You’ll be able to make purchases and receive credit score benefits but won’t be responsible for charges.
How to Build Credit without a Credit Card
If you’re not ready for a credit card or can’t get approved for one, here are some ways to build credit without a credit card.
Credit-builder loans
Credit-builder loans are a lot like what they sound like. They’re low-interest rate loans that help borrowers with poor or no credit build credit, and they function differently than your typical loan.
With a standard loan, you receive the money you’re borrowing upfront, but with a credit builder loan, the money is held in a savings or CD account until you pay it off. This makes it very low-risk for the lender, as your payments are also adding your collateral to the savings account.
You make monthly payments, including interest on the loan, and making these payments on time will help build your credit. Once you pay off the loan, you get all the money back and in some cases, interest if it was incurred while your savings collateral was being held.
Rent reporting
The three major credit bureaus, Equifax®, Experian® and TransUnion®, only include rent payment information on your credit report if they receive it. Most landlords don’t report this information, but it could benefit your score if you consistently pay your rent on time.
You can ask your landlord to report your rent payments or find a rent reporting service that will let you submit the information yourself. Ideally, your rent payments should be reported to all three bureaus for maximum impact.
Passbook loans
This type of loan is very similar to credit-builder loans, except it uses the money you already have in your savings or CD account as collateral. Interest rates for passbook or CD loans are typically lower than credit cards or personal loans.
Like credit-builder loans, you build credit as you make payments on the loan each month and can access the money once you’ve paid it off. Check that your bank will report your payments to all three credit bureaus before taking out this type of loan.
Building Credit with a Credit Card FAQ
Have more questions about how to use a credit card to build credit? Check out the answers to these common credit card questions.
When should you pay your credit card bill to build credit?
You should pay your credit card bill by its due date, at the very least. Paying your bill early (before the end of your billing period) or making extra payments if you’re planning to carry a balance may help boost your credit score even more since it will reduce your utilization rate.
How fast does a credit card build credit?
While it may take a while to build credit, you can help establish a baseline credit score if you have an account open and active for 6 to 12 months, to allow your FICO® score to be calculated. You may be able to establish a baseline credit score after 6-12 months of making credit card payments on time. With consistent and responsible credit card usage, you should see a positive impact on your credit over time.
Do you need a credit card to build credit?
No, you don’t need a credit card to build credit. Responsible credit card usage is one of the easiest ways to build credit, but it may not be the right answer for everyone. There are other ways to improve your credit score, like taking out loans, reporting rent and utilities or being added as an authorized user to someone else’s credit card.
A credit card is a great way to start building credit. If you’re looking for more ways to boost your credit score, check out our resources on Credit.com and the features included with ExtraCredit. ExtraCredit is a full- credit score monitoring service that can help you understand what areas of your credit you need to work on to build and maintain your good credit.
A good credit score will make your life a lot easier; it will help you qualify for loans, apartments and even jobs. But you’re not born with a credit history. Much like you have to spend money to make money, you need to borrow money to prove you’re good at borrowing (and paying back your debts). In fact, according to Nationwide, credit scores help insurance companies predict future losses. So, how can you start your credit-building journey? Here are ways new cardholders can build credit.
Understanding Credit Score Perks
Your credit score is woven into almost every area of your life. “Crummy credit can cost you a fortune throughout your life,” explains Matt Schulz, chief credit analyst at LendingTree. “It’s as simple as that. It’ll lead to higher interest rates and fees on mortgages, credit cards and loans. It can keep you from getting the apartment you want. It can lead to higher insurance premiums. It’s a big, big deal.”
There are two main types of credit scores: your FICO Score and your VantageScore. Most lenders review your FICO Score when making a financing decision. It ranges from 300 to 850, with a “good” score starting in the high 600s. It’s calculated based on a variety of factors, including payment history, credit usage, the length of your credit history, and more. The VantageScore follows similar metrics but focuses less on payment history, allowing scores to be generated faster than FICO. Regardless of the type of score, a proven record of responsible borrowing shows lenders that you’re more likely to pay back your debt, and then they can offer you lower interest rates and charge fewer fees.
Related Read: 7 Unexpected Benefits of a Good Credit Score
New to Credit? Here’s How to Build Your Score Quickly
Get a secured credit card. A secured credit card is a great way to build credit from scratch. It works just like an unsecured card, except that you make a security deposit that is equal to the amount of the credit limit. For example, if you deposit $500, your credit limit is also $500. “Consumers love these cards because they’re easy to get and their low credit limits mean there’s no danger of going too wild on a spending spree,” says Schulz. “Banks love them because there’s no risk. If someone doesn’t pay their bill, the bank simply takes the security deposit. It’s a win for everyone involved.” Before applying for a secured card, make sure the lender reports your usage to the three credit bureaus–Equifax, Experian and TransUnion. If it doesn’t, you won’t build credit. Also, check to see if the lender offers an upgrade to an unsecured card.
Make timely payments. Once you have your first credit card–be it secured or unsecured– focus on paying your bill in full on time, every time. Payment history is a big component of your credit score. Each month you pay your full balance on time, you’re proving your creditworthiness. “Think about it like borrowing the car keys from your parents,” explains Schulz. “The first time you do it, they’re not going to let you do much. Once you’ve shown you can handle a little responsibility, they’ll give you more, though. Eventually, they’ll hand over the keys without thinking much of it.”
Use your card often. The more you use your card, the better. The key, though, is to use it smartly. Pick up the check when you’re out to dinner with friends, knowing they’ll reimburse you for their meals. Use it for everyday expenses like groceries and gas. You can even use your card to pay rent, though there will usually be processing fees added on by your landlord. Just remember: Pay the bill in full, every month. You should also never max out your card. Your credit utilization ratio–how much credit you’re using compared to the total credit available to you–is another aspect of your credit score.
Become an authorized user. If you can’t open a credit card yourself yet, become an authorized user on someone else’s account. Ultimately, they will be responsible for the charges on the account, so you need to have a good relationship with this person. Becoming an authorized user allows you to link to this person’s good credit and thus build yours with steady payments.
Apply for a credit-builder loan. A unique way to build credit is to apply for a credit-builder loan. With these loans, you make monthly payments to the lender for a set period of time. The deposits are kept in a savings account or a certificate of deposit. Once the payment period ends, you get the money back, sans fees or interest charged.
Be determined. Building credit can be daunting, but don’t give up. With each passing month, your timely payments will boost your score. Use texts or autopay features to make sure you’re paying your bills on time. Do whatever you need to do to keep at it. Different apps and some credit cards offer estimates of your credit score, but know that you’re entitled to one free credit report every year from AnnualCreditReport.com. Get in the habit of checking your report every year to make sure there are no lingering issues that are hampering your credit-building endeavors.
About the Author
Chris O’Shea is a freelance writer whose work has appeared in GQ, NerdWallet, Esquire, New York Magazine, and more.
Congratulations! You’re officially an adult. Turning 18 opens a world of possibilities and freedom, but it also comes with additional responsibilities. One important responsibility to start thinking about is building your credit profile.
Credit can be a critical resource. A good credit score helps you get approved for loans and credit cards. It also helps reduce the expense associated with your debts, as you’re more likely to get approved for lower interest rates if your credit is better.
Your credit score and history can also help—or hinder—you when you’re applying for certain types of employment, a new apartment, utilities, or auto insurance. Find out more about credit and how to build credit at 18 in the guide below.
How to Start Building Credit at 18
1. Learn How Credit Works 2. Monitor Your Credit Score and Reports 3. Sign Up for ExtraCredit 4. Become an Authorized User 5. Get a Secured Credit Card 6. Apply for a Credit Builder Loan 7. Understand How Student Loans Can Help Your Credit 8. Don’t Try to Overdo It 9. Make a Budget and Stick to It
1. Learn How Credit Works
You know that knowledge is power, and understanding how to get credit and how it all works can make a big difference. Here are a few basics.
Your Credit Score
There are multiple scoring models, but they all work to provide a numerical score that tells lenders how likely you are to pay back your debts. Higher credit scores are more attractive to lenders and creditors. Five main factors influence your score:
Your Credit Report
Your credit reports are maintained by three major credit bureaus—Experian, TransUnion, and Equifax. They contain data on your current and past debts, payment history, residential history, and other information about your credit history. This data is supplied by lenders, creditors, and businesses where you have accounts. The information on these reports is fed into the credit scoring models to determine your credit score.
Here’s where it starts getting complex. The information on those reports isn’t always the same. Some businesses and lenders only report to one or two of the credit bureaus. Some don’t report to any.
So, your credit report can be a little different with each of the bureaus. That means your credit score can also vary depending on which report and scoring model is being used.
2. Monitor Your Credit Score and Reports
Once you understand some basics about credit, you should take a look at your own credit reports. Monitoring your credit is one of the best ways to learn what will positively or negatively impact your scores. It also helps you catch inaccuracies or signs of identity theft sooner. Is there an account on your report that’s not yours? It could be bringing your score down even before you learn how to start building credit! If you find inaccurate negative information on your credit report, you can challenge it.
There are a few ways to check your credit reports.
AnnualCreditReport: You can request one report per year from each of the three bureaus at AnnualCreditReport.com. The bureaus are allowing you to request your reports weekly due to the effects of coronavirus through April 2022.
Credit Report Card: You can also get information about your credit reports via the free Credit Report Card at Credit.com. This is a breakdown of how you’re doing with each of the five major factors that impact your credit score. Your personal Credit Report Card can help you understand where you might need to work to positively impact your credit.
ExtraCredit: If you’re really serious about understanding your credit reports and scores, sign up for ExtraCredit. The Track It feature lets you see 28 of your FICO® scores and credit reports from all three credit bureaus. These scores are ones that lenders look at when making approval decisions.
ExtraCredit does more than just show you your credit scores. Have you recently started paying rent or utilities? The Build It feature lets you add them as tradelines with the TransUnion and Equifax credit bureaus. That means you’ll get credit for bills you’re already paying—building your credit profile each month that you pay those bills.
This is important, because rent and utility payments don’t usually show up on credit reports. That’s simply because utility companies and landlords don’t tend to bother to report them. ExtraCredit helps you ensure you’re getting credit for those on-time payments anyway.
4. Become an Authorized User
If a friend or family member has a credit card and is an account holder in good standing—meaning they pay their bills on time—ask if they’ll add you as an authorized user. Make sure that their credit card company reports to the credit bureaus for authorized users first or this is a pointless exercise.
You don’t even need a card or to use their account. If the credit card company reports on authorized users, you’ll get their on-time payments posted to your credit reports if your friend or family member makes them.
If you’re looking for how to start building credit at 18, this can be a quick method. However, it does come with some potential risk. If that person doesn’t pay on time or runs up their credit card balance, your credit score could suffer from the negative reports too.
5. Get a Starter Credit Card
For those who want to know how to start credit building without someone else, a secured credit card might be a good place to start. Some credit card companies also offer unsecured credit cards for those with no credit. These tend to have low credit limits and may have high interest rates.
If you can’t find an unsecured credit card, though, a secured card is much easier to get in general. You have to secure it with a deposit—typically in the amount of the credit limit. For example, if you put down a $250 security deposit, your initial credit limit is $250.
You build credit by using the card and paying the bill on time each month. Make sure you opt for a credit card that reports to all three of the bureaus to maximize the benefits to your credit history. Usually after a certain number of timely payments, you get your security deposit back and may even be eligible for an increase in credit limit.
Two options you might consider are the OpenSky Secured Visa and UNITY Visa Secured card.
OpenSky® Secured Visa® Credit Card
No credit check to apply and find out instantly if you are approved
OpenSky gives everyone an opportunity to improve their credit with an 85% average approval rate for the past 5 years
Get considered for a credit line increase after 6 months, with no additional deposit required
You could be eligible for the OpenSky Gold Unsecured Card after as few as 6 months
Reports to all 3 major credit bureaus monthly, unlike a prepaid or debit card. Easy application, apply in less than 5 minutes right from your mobile device
View your FICO® Score through your OpenSky account, an easy way to stay on top of your credit
Nearly half of OpenSky cardholders who make on-time payments improve their FICO score 30+ points in the first 3 months
Your refundable* deposit, as low as $200, becomes your OpenSky Visa credit limit
Offer flexible payment due dates which allow you to choose any available due date that fits your payment schedule
*View the cardholder agreement
UNITY® Visa Secured Credit Card – The Comeback Card™
Unlike your Prepaid Card, UNITY Visa secured card can help you build your credit. Apply online in less than 5 minutes, and you could be approved today!
No Minimum Credit Score required; low fixed interest rate of 17.99%; Fully refundable FDIC security deposit* required at time of application; if you have a min of $250 to deposit immediately, you can start now!
No application fee or penalty rate
Monthly reporting to all 3 major credit bureaus
24/7 online access to your account
*See the Cardholder Agreement for more details.
6. Apply for a Credit Builder Loan
Remember that credit mix is important to your credit score. That means you can’t just have one type of credit—such as a credit card—for maximum impact. You may also want an installment loan on your account.
A credit builder loan is one way to get an installment account on your credit history. These work like a traditional loan in reverse: if you’re approved, your funds get placed in a secured certificate of deposit and are given to you after you’ve paid off the loan.
>> Read our Review of Self Credit Builder Accounts
As you pay the loan as agreed, you’ll enjoy the benefit of positive payment history building on your credit report. Once you pay off the loan, the savings account is unlocked and you gain access to the money.
7. Understand How Student Loans Can Help Your Credit
If you have a student loan in your name, you may already have an installment loan on your credit history. This is true whether your parents acted as guarantors or cosigners or not, but it’s not true if your parent simply took the loan out for you. In that case, the lender would only report on your parent’s credit history.
As with any type of debt, student loans can help you start building credit if you pay them on time. So make sure you keep up with your loan status. If you use options such as deferment—especially during COVID-19—keep an eye on your credit report. Make sure your lender doesn’t report you as paying late when you’re within an agreed-upon deferment period.
8. Don’t Try to Overdo It
Building credit is a marathon, not a 100-yard dash. While some actions can positively impact your credit quickly, as a young person you’re unlikely to have a super robust credit history in just a few months.
Take your time and don’t try to engage in every credit-building tactic at once. You certainly don’t want to max out your debt in an effort to build credit. That could leave you unable to make your payments, which tanks your credit score before you have time to really build it.
9. Make a Budget and Stick to It
Finally, make a budget and stick to it. Spend what you can afford, and don’t take on debts you can’t pay fairly easily. You have years to continue building your credit, and a history of smart decisions and timely payments is one of the best things for your score long-term.
Start Building Credit Now
Building your credit at 18 is possible. It just takes time, commitment to making smart money decisions and an understanding of how credit works.
Whether you’re on your first credit card or your fifth, it’s essential to sit down and think about which type of card is best for you and your spending habits. Even the most careful of credit users can find themselves in a financial bind if they aren’t careful about the type of card they choose.
Learn which factors to consider when making your decision, and the right questions to ask yourself in your quest for the ideal credit card.
Find Out Your Current Credit Score
Before you start checking out the newest credit cards, look at your latest credit score. Depending on your credit score, you may not be eligible for some cards, so you might as well rule those out before you get too attached to those great rewards.
Your current credit card company may offer you free access to your credit score, but you can also request a free annual credit report from the three major credit bureaus: Experian, TransUnion and Equifax. Once you receive your report, check it for discrepancies before you continue with picking a credit card.
Think About How You Plan on Using the Card
Are you looking to get a card to boost your credit score, for emergencies only, or to receive rewards? Your answer will help you to further narrow down your credit card options. Cards with longer grace periods and no annual fees to worry about are well suited for those who always pay their credit balance in full every month.
If you know you’re likely to have a monthly balance on your card, focus on cards that have low interest and introductory rates. Credit cards with generous rewards programs and credit limits are often the best fit for users who use cards often. The best credit card for emergency situations is one that comes with low fees and interest.
Cards for Beginners
Will this be your very first time applying for a credit card? College students who find themselves in this situation are encouraged to apply for unsecured student credit cards, mainly because they’re the easiest to apply for.
Because it’s so easy to go buck wild with your first credit card (and even your fourth), beginners are encouraged to give all of their paperwork a careful and thorough read through, no matter how many pages there are. Make sure you’re aware of fees/penalties, your interest rate, payment due dates and your limit. Start developing good spending habits now to keep from learning how to climb out of a pit of debt between your classes.
Rebuilding Your Credit House
Individuals who are picking a credit card to help them repair their damaged credit may find it easier to apply for a secured credit card. While you have to drop a deposit of $200 or so before receiving the card, know that you’ll receive that money back when you close your account in good standing or upgrade your account. The deposit is a good incentive for you to change how you use your card and how you spend money.
The Interest Rate
No matter how good or not-so-good your credit might be or what you’ll be using the card for, pay close attention to the amount of interest you’ll have to pay as you’re searching for the best credit card. Your interest rate, sometimes referred to as your annual percentage rate or APR, can either be variable or fixed. Fixed interest rates remain the same from month-to-month, making it easier for you to keep track of how much you’ll pay, while variable interest rates are more fluid.
That being said, a fixed rate can change if you exceed your credit limit or are late making a payment. You should also look out for notices from your credit card issuer letting you know if your fixed rate will change in the coming months.
Additional Considerations
Besides low interest rates and fees, there are other factors to consider when picking a credit card. For instance, you may prefer a card that notifies the three major credit bureaus of your monthly payments, or one with a low annual fee. There are also credit cards that let you upgrade your account to one with more competitive terms once you’ve successfully built your credit.
Some consumers prefer cards with low balance transfer fees. If you’re in this category, find out if there are any restrictions on the type of debt you’re allowed to transfer and if you’re restricted in the amount of debt you can shift over. Additionally, the purchase APR on a card might be different from the transfer APR, so be sure to ask about that as well.
Be cautious during your search for the best credit card. These tips, some careful planning and an honest self-evaluation are sure to be your guiding stars throughout your quest.
Article originally published March 31st, 2020. Updated December 16th, 2022.
The Coronavirus Aid, Relief, and Economic Security Act, an economic relief package in response to the COVID-19 coronavirus pandemic, waives the 10% early withdrawal penalty for individuals who take out up to $100,000 from qualified retirement accounts for coronavirus-related purposes. Learn More.
Note: This article does not constitute legal advice. Please consult a lawyer or financial/ tax advisor about your specific situation.
Paying off debts or covering an unplanned expense are common reasons people tap into their 401(k)s early. But a 401(k) withdrawal can come with hefty tax penalties if you pull your money out too soon. Find out more about how to take money out of a 401(k) below, and decide whether it’s the right decision for you.
How to Withdraw from Your 401(k) Early
Your 401(k) account is meant to be a retirement account. That means it’s set up for you to start withdrawing from after a certain age—generally 59 ½. But you may be able to withdraw sooner if you feel you need your money now. Here’s how.
Check with your employer to find out if early withdrawals are an option. Not every employer allows withdrawals.
Find out what types of withdrawals are allowed. In some cases, 401(k) withdrawals are limited to certain amounts or allowed only for certain reasons.
Get withdrawal paperwork from your human resources department or download it from your 401(k) provider’s site.
Review the penalties and taxes you may pay for taking the money out early and ensure that you are okay with them.
Complete the paperwork and submit it. Disbursements may be made by check or directly into your bank account, depending on the provider, and may take up to several business days once the 401(k) withdrawal is approved.
401(k) Early Withdrawal Penalty
In general, when you make a withdrawal from your 401(k) before you reach age 59 ½, the Internal Revenue Service may charge you a 10% early withdrawal penalty.
You’ll also pay taxes on any amounts you cash out. That’s because your 401(k) was funded with pre-tax income from your paycheck. You didn’t pay taxes on it at that time, but you must pay taxes on the money when you draw it out to use as income later.
401(k) Hardship Distribution
If your employer plan provides for hardship distributions, you can take a portion of your 401(k) funds to assist in paying for some specific expenses without paying the standard 10% early withdrawal penalty. Each employer plan is different, though, so even if your plan allows for hardship distributions, it may not allow for the particular use you have in mind.
For example, some plans allow for medical or funeral expenses but will not allow for tuition and education expenses. Some plans will, regardless, the plan must have clear requirements. Before considering a hardship distribution, be sure to read the fine print on your plan to determine if your need is eligible.
In general, some expenses that can be covered using a hardship distribution might include:
Tuition, including room and board, for yourself, your spouse, dependents and certain beneficiaries
Medical expenses for yourself, your spouse or dependents
Purchase costs for your principal residence, not including mortgage payments
Costs related to avoiding foreclosure on or eviction from your principal residence
Repair costs for damages to your principal residence
Funeral expenses for deceased parents, spouse or dependents
Hardship withdrawals have hit a record high for the first time in nearly 20 years.This kind of spike is a testament to how it has become increasingly difficult for Americans to have a retirement safety net in the current economic climate. This increase is likely due to inflation concerns creating further economic hardship. Use this guide before considering a 401(k) withdrawal.
Even though the early distribution penalty is waived on approved hardship distributions, any withdrawal you make is taxed as regular income. You should consider what that means for your bottom line and review whether you’re pushing up against a higher tax bracket when taking the withdrawal into consideration.
401(k) Loan
Another way to get money from your 401(k) now without paying the withdrawal penalty is a 401(k) loan. This can be a good option if you can’t get a hardship distribution or want to borrow against your 401(k). Plans are not required to provide for loans, so review your plan to determine if this is an option for you.
What Is a 401(k) Loan?
A 401(k) loan is literally a loan that’s funded by your 401(k). When you take out this type of loan, you actually borrow from your future self. These loans come with interest, which you pay back into the 401(k) account—so you’re paying the interest to yourself.
401(k) loans let you take out a certain amount from your 401(k)—usually up to $50,000 or 50% of the account’s assets—without calling it “income.” You can use that money without paying the 10% withdrawal penalty or paying taxes on it.
Advantages of 401(k) Loans
Unlike a hardship distribution, you do not need to demonstrate financial need to take out a 401(k) loan. As long as your plan allows for loans and you meet the terms, you can take out this type of loan. Because interest payments on these loans are only meant to restore the account to its original state (as if you had not taken out the loan), 401(k) loans often have lower interest rates than other loans. And 401(k) loans for approved purposes may not require a credit check, so they might be an option when other credit is not. This is especially true as your employer may simply take the 401(k) loan repayments directly out of your paycheck.
Disadvantages of 401(k) Loans
When you take money out of your 401(k), it’s no longer earning interest for you. Typically, the interest you pay on the loan isn’t as much as your 401(k) could be earning in the same time period. That can mean a reduced total when it comes time to retire.
In most cases, you are required to repay a 401(k) loan within five years. If you quit your job before you pay off the total amount of the loan, you might be asked to repay the rest immediately. If you fail to meet the terms of the loan, the remainder of the loan might be treated as a withdrawal. That means you’re on the hook for taxes and the 10% withdrawal penalty.
401(k) Withdrawals After Age 59½
If you retire or lose your job after you turn 55, you may be able to avoid the 10% early withdrawal fee. In general, this applies only to the 401(k) plan from the employer you just left. Earlier plans are not eligible.
Once you reach age 59½, you may begin withdrawing funds from your 401(k) without penalty. You can choose a lump-sum distribution or periodic distributions based on your personal needs. Keep in mind that you’ll pay income taxes on lump-sum distributions right away. It’s a good idea to talk to your financial planner to decide what option is best for you.
You can, however, leave your retirement funds where they are until you reach age 72. At that point, plan participants encounter Required Minimum Distributions, when the IRS requires that you begin taking distributions of a certain amount each year (before 2020, the age was 70½). Your tax burden on those distributions will depend on your total annual income.
Are There Good Alternatives to Early 401(k) Withdrawals?
For those with good credit scores, there are a number of alternatives to 401(k) withdrawals that don’t come with a 10% tax penalty and don’t dip into your retirement savings. Here are a few options to consider.
Home Equity Lines of Credit
If you have equity in your home—which means it’s worth more than you owe on it—you might be able to borrow against that value. You can then use the money from a home equity line of credit (HELOC) to cover expenses or pay down other debts.
Pros: Because home equity lines of credit are secured, you may be able to secure a lower interest rate on them than with other types of debt. They also offer some flexibility, as you can use as much of the line of credit as you need as you see fit.
Cons: You need equity to access this type of debt. You also have to ensure you can pay it off if you plan to sell your home.
Personal Loans
Personal loans are typically unsecured debts you can use for personal purposes. If you’re approved for a personal loan, you might use it to pay off medical bills, consolidate other debts or cover an emergency home repair, for example.
Pros: Personal loans are available for all types of credit histories and needs. Doing a little research can often turn up a loan option that might work for you. Repayments are typically made over long periods, which can make monthly payments affordable.
Cons: Depending on your creditworthiness, a personal loan can come with a higher interest rate than other options. If you have bad or no credit, you may be limited to credit building loans, which can require a deposit.
Credit Cards With Low APR Introductory Offers
Credit cards with an introductory 0% APR on purchases make it possible to finance a large purchase and pay it off over several months without paying interest.
UNITY® Visa Secured Credit Card – The Comeback Card™
Unlike your Prepaid Card, UNITY Visa secured card can help you build your credit. Apply online in less than 5 minutes, and you could be approved today!
No Minimum Credit Score required; low fixed interest rate of 17.99%; Fully refundable FDIC security deposit* required at time of application; if you have a min of $250 to deposit immediately, you can start now!
No application fee or penalty rate
Monthly reporting to all 3 major credit bureaus
24/7 online access to your account
*See the Cardholder Agreement for more details.
Pros: Credit cards with low APR offers can let you finance purchases or consolidate credit card debt and pay it off faster. They can also help you continue to improve your credit as you make timely payments.
Cons: Most of these cards require good to excellent credit. If you don’t pay off the balance within the required period, you can get hit with hefty interest rates.
Your 401(k) and Your Future
When you’re facing a financial crisis right now, borrowing from your 401(k) can seem like an obvious answer. But carefully weigh the costs of doing so. You are, in effect, stealing from your future. If you can, look for other options that help both current-you and future-you.
If you’ve ever had to repair your credit, you know how much of a struggle removing inaccuracies from your reports can be. The bad news is that in many cases, after removing negative accounts from your credit history you may only see a slight increase or maybe even no change at all to your credit score.
Why? Because you need a healthy credit profile to have a healthy credit score. If all you have is negative items on your credit reports and you’ve removed them all, you might not have much of a report left to build a credit score with.
One of the easiest ways to build a good credit score is to improve your credit utilization ratio. You can do this by expanding the total amount of credit available to you by applying for a new credit card.
If you’re currently working with a low credit score right now, and are worried about being approved for a credit card, we’ve got you covered. Here’s our top 4 easy approval cards.
Best Overall Card: Chime
Secured Chime Credit Builder Visa® Credit Card
Qualifying direct deposit of $200 or more. Checking account required.
No annual fee. No minimum* security deposit. No credit check to appy
*Money added to Credit Builder will be held in a secured account as collateral for your Credit Builder Visa card, which means you can spend up to this amount on your card. This is money you can use to pay off your charges at the end of every month.
Build credit history with your own money on everyday purchases
View and track your FICO® Score right in the Chime app. FICO Scores are used by 90% of top lenders*
Chime is a financial technology company, not a bank. Banking services provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Credit Builder Visa® Card is issued by Stride Bank, N.A., Member FDIC, pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted.
If you’re ready to start building your credit history, we suggest Chime as a simple, easy way to start. Unlike most other secured cards, Chime does not require a minimum security deposit to get started.*
So if you don’t have a large chunk of cash to put down up front, you can put down however much you’re able to afford. That amount becomes your credit limit, so you can start building up your limit over time.
Even better – they also don’t have a minimum credit score required to get started! In fact, they don’t run a credit check at all, so you don’t have to worry about a hard credit pull popping up on your report.
*Note: To apply for Credit Builder, you must have received a single qualifying direct deposit of $200 or more to your Checking Account.
Other Recommended Secured Credit Cards
Most secured credit cards require the user to put down a cash deposit to secure their line of credit, which makes them a great option for people looking to build up their credit with on-time payments. Here are a few other secured cards we’d recommend.
Combined credit builder account and secured card products to help you build credit and save* money (minus interest and fees) No credit check.
No credit check. No credit history required.
Start with a credit builder account that reports to all 3 credit bureaus. Each on-time monthly payment builds credit history and savings. Choose the plan that works for you.
Make at least 3 monthly payments on time, have $100 or more in savings progress in your account, and be in good standing* You’ll automatically be eligible for the Self Visa® Credit Card, without a credit check.
Your savings progress from your Credit Builder Account acts as your refundable security deposit.
The Self Visa® Credit Card is accepted at millions of locations in the U.S.
Stay on track with credit utilization monitoring, auto pay, account reminders, a mobile app, and dedicated customer support.
*Sample Product for Credit Builder Account: $48 monthly payment, 12 month term with a $9 admin fee at a 15.92% Annual Percentage Rate. Please refer to www.self.inc/pricing for the most recent pricing options.
**Disclaimers, Rates and Fees: https://www.self.inc/card-agreement and https://www.self.inc/terms-of-service
We like the Self – Credit Builder Account + Secured Visa® Credit Card combo because it uses your progress on your credit-builder loan to approve you for a credit card, allowing you to side-step a credit inquiry to qualify for your card.
OpenSky Secured Visa
OpenSky® Secured Visa® Credit Card
No credit check to apply and find out instantly if you are approved
OpenSky gives everyone an opportunity to improve their credit with an 85% average approval rate for the past 5 years
Get considered for a credit line increase after 6 months, with no additional deposit required
You could be eligible for the OpenSky Gold Unsecured Card after as few as 6 months
Reports to all 3 major credit bureaus monthly, unlike a prepaid or debit card. Easy application, apply in less than 5 minutes right from your mobile device
View your FICO® Score through your OpenSky account, an easy way to stay on top of your credit
Nearly half of OpenSky cardholders who make on-time payments improve their FICO score 30+ points in the first 3 months
Your refundable* deposit, as low as $200, becomes your OpenSky Visa credit limit
Offer flexible payment due dates which allow you to choose any available due date that fits your payment schedule
*View the cardholder agreement
We like OpenSky Secured Visa because there is no credit check required to apply, and you can request an extension on your credit line after six months. Unlike most other secured cards, OpenSky also allows you to fund your security deposit in payments, making it even easier to get started.
Best Balance Transfer Card: UNITY® Visa Secured Credit Card – The Comeback Card™
UNITY® Visa Secured Credit Card – The Comeback Card™
Unlike your Prepaid Card, UNITY Visa secured card can help you build your credit. Apply online in less than 5 minutes, and you could be approved today!
No Minimum Credit Score required; low fixed interest rate of 17.99%; Fully refundable FDIC security deposit* required at time of application; if you have a min of $250 to deposit immediately, you can start now!
No application fee or penalty rate
Monthly reporting to all 3 major credit bureaus
24/7 online access to your account
*See the Cardholder Agreement for more details.
We like this card because not only does it report your on-time payments to all three credit bureaus (helping you build up those positive credit signals) but it also offers a promotional rate for balance transfers of 9.95% for six months. Considering how difficult it can be to find a good balance transfer card with an easier application process, we especially recommend this card if your goal is to rearrange your credit card debt.
Building (and Protecting) Your Credit
While your score may not be strong enough to allow you apply for credit cards that offer better cashback or rewards, there are many credit cards in our list above that offer at least some of those same benefits and provide more support for reporting your good credit behavior to the bureaus.
Just as a reminder, payment history can be the heaviest factor when it comes to calculating your credit score. Although you may want to improve your score by applying for a new credit card, make sure that you can avoid any late payments that may hit your reports and jeopardize all your hard work.
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations.
Can you pay a loan with a credit card? Yes, paying a loan with a credit card is sometimes possible. Yet, whether or not you can do so depends on factors such as the lender’s policies or the type of loan you want to pay off.
Good credit can open doors, but bad credit can keep them shut. In fact, research shows one in 10 Americans were denied work because of poor credit history! Good credit is important because it tells lenders you’re not a risk and that you pay loans on time. A good score can help you get approved for mortgages, financing, loans, and credit cards. Bad credit leads to more fees, higher interest rates, and rejected applications.
Aside from securing loans, your credit can impact your ability to secure housing and even employment. Understanding your credit score can help you make more informed decisions. We’ll explore how credit works, why it’s important, and how to maintain a good credit score.
What Is Credit?
We often hear people saythat it’s important to build credit. But what is credit? When you pay for something “on credit,”you’re actually borrowing money to make the purchase, which you pay back later. But when people say “your credit,” they’re usually talking about a credit score.
Your credit score is a three-digit number calculated by FICO®, VantageScore, or other scoring models. Your score indicates how well you manage credit. Institutions and agencies use this score to determine risk, such as how likely you are to repay loans on time. A credit score of 670 or higher is considered good by most standards.
Why Is Credit Important?
Good credit is important because it helps you secure loans, mortgages, rentals, and other important financial goals. Financial institutions perform a credit check before approving applications, and use your credit history to determine available options, associated fees, and interest rates.
Credit can impact our daily lives in many ways. Potential lenders, landlords, and employers might reject your application if you have bad credit. But good credit can help you get approved for loans and save money.
There are many benefits to a good credit score. You’ll need a strong credit score for things like:
Loan applications: Lenders assess your credit to determine how likely you are to repay a loan. People with poor credit may face higher interest rates, smaller loans, or rejection.
Credit card applications: Banks and credit card companies need to look at your credit report before you can get a credit card. With good credit, you can get lower interest rates and higher limits.
Mortgage applications: Your credit score will determine monthly payments and interest rates. Good credit is essential if you can’t afford a large down payment.
Rental applications: Landlords can run a credit check or ask you to provide one. Credit score won’t impact the rental costs, but a landlord can reject an application due to poor credit.
Job applications: Prospective employers can ask for credit checks, especially if you are dealing with sensitive information. You may need a credit check for jobs in accounting, sales, the military, and other industries.
Insurance applications: Depending on where you live, you might need a credit check for insurance. Not all states allow insurance companies to access your credit information.
Vehicle rentals: You might need a credit check for vehicle rentals if you don’t pay with a credit card. And depending on your state and the company, your credit may impact your rental options.
Credit card benefits: Good credit can help you secure credit cards with benefits, including airline miles, travel credits, cashback rewards, and other perks.
Lower interest rates: Poor credit leads to higher interest rates, making borrowing money expensive. The better your credit, the more money you will save.
Better loan terms: Good credit gives you more options and freedom for repayment. Bad credit can limit your options to short-term loans with higher monthly payments.
Credit is always important, no matter how high or low your score. At the end of the day, everybody needs good credit to achieve their financial goals. That’s why it’s important to understand what can impact your credit score.
What Can Impact a Credit Score?
It might be surprising, but personal savings and stocks don’t impact your credit score. Credit score calculations look at your detailed credit history, and anything that impacts these calculations will impact your score.
The five main factors that impact your credit score are:
Payment history: when you make payments
Credit utilization: the amount of credit you use compared to your limit
Credit age: how long you’ve had credit and how old your accounts are
Credit mix: the types of credit you hold
Credit inquiries: how often your credit is reviewed
While this might look simple, many surprising scenarios can affect your credit. Unpaid parking tickets in collections can impact your payment history, for example. And closing a credit card can lower your credit utilization. You can review your free annual credit reports to watch for drops in your credit and work toward preventing a bad score.
What Happens with a Bad Credit Score?
Keep in mind that you can improve a bad credit score over time. But until you do, there can be negative consequences. Most credit scores range from 300-850, depending on the scoring model. A bad credit score generally ranges from 300-600.
Bad credit scores can lead to:
Rejected applications
Higher fees and interest rates
Lost work opportunities
Difficulty renting a vehicle
Required deposits for utilities
Difficulty securing a student loan
Expensive insurance rates
Difficulty opening bank accounts
Bad credit doesn’t shut every door, but it can make life more difficult and expensive. It’s important to check your credit score before buying a home, applying for student loans, and other important life events. This will give you time to understand your situation and make a plan to build and improve your credit.
How Do You Build and Improve Credit?
Now that you understand what credit is and why it’s important, you can plan for success. There are many ways to build and improve your credit without overextending yourself. No matter your score today, you can work toward a bright future with good credit.
Understand how credit works: Learn how your credit score works and what can impact it.
Set goals for yourself: Use this knowledge to set goals for minimizing debts, increasing utilization, and more.
Address your debts: Assess your debts and plan to pay them off.
Monitor your credit score: Look for suspicious activity on your credit report and be aware of the potential impact on your score.
Clean your credit report: Dispute errors on your credit report.
Get a secured credit card: Use it regularly and pay your bills on time.
Become an authorized credit card user: Build credit in association with somebody you trust.
Apply for a credit builder loan: Improve your score if you have poor or no credit.
Create a budget: Manage your finances to ensure consistent repayments.
Achieving a good credit score isn’t the end of your credit journey—once you have a good credit score, you will need to maintain it. Stay diligent and follow best practices to keep a good credit score.
How Do You Keep a Good Credit Score?
Don’t take good credit for granted. To keep a good credit score, you need to stay organized and sensible about your credit usage. This means understanding your responsibilities and following best practices for credit management.
Follow these tips for keeping a good credit score:
Stick to your budget: Committing to a budget can help you make payments on time, which is key to achieving a good credit score.
Avoid carrying debt: Credit utilization is the second most important factor that makes up your credit score. Unpaid debts accumulate interest, which means less money for you.
Pay bills and parking tickets on time: It’s important to pay all utility bills, phone bills, and parking tickets on time. Not paying bills can lead to collections and this impacts your credit score.
Don’t let debts go to collections: You should avoid collections at all costs. When unpaid debts go to collections, it can cause significant damage to your credit score.
Monitor your credit score and reports: When it comes to your credit, ignorance is not bliss. It’s important to watch your credit report for changes, errors, and suspicious activity.
Protect yourself from identity theft: A large drop in your credit score can be a sign of identity theft. Stay aware, protect your information, and consider a credit card with security features.
Use your credit card consistently: Using your credit card will help you build credit—just don’t spend more than you’re able to pay back each month.
Don’t close old credit cards: Closing a credit card lowers your credit mix, so it’s a good idea to leave old credit cards open, even if you don’t use them. Keep an eye on them for suspicious activity.
Only authorize people you trust: Authorized users on your accounts can impact your credit score. Only authorize accountable and trustworthy people.
Avoid retail credit cards: While retail credit cards can be easy to get, they can come with expensive rates and fees. And not all retail credit cards report payments, making them less ideal for building credit.
Don’t treat credit like extra cash: Building credit takes organization and discipline. You should always stick to a budget and avoid spending beyond your means.
Your credit score is like a financial reflection of you, so take pride in your credit and make an effort to keep a good score. Knowledge is power—the more you understand credit, the more confident you’ll feel when preparing for large purchases and other financial ventures.
Whether you have good or bad credit, it’s all about setting goals and staying organized. Remember, your current score is not set in stone. You can always improve credit management and make a difference in your future.
If you’re worried about bad credit or just want to see where you stand, get your free credit score today.
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There are many ways to improve your credit score fast, like checking the accuracy of your credit reports, fixing late payments, becoming an authorized user, and much more. Each method can add points to your current credit score.
Having a bad credit score can make it difficult to navigate life, and it can also cost you quite a bit of extra money. A low credit score can increase your interest rates for credit cards and loans and may also require you to put down larger deposits when renting a home or turning on services. However, a good credit score gives you more options for where you can live and the loans you can get. Plus, it can save you money in the long run, which is a win-win for most.
Here, we provide you with 11 different ways that might help you improve your credit score faster. Not only will these methods help you improve your credit score, but they’ll also help you maintain a healthy score in the future.
In This Piece:
Check the Accuracy of Your Credit Reports
Target the Areas You Need to Improve
Fix Your Late Payments
Get Added as an Authorized User
Clear Any Outstanding Collection Accounts
Open a Secured Credit Card
Dispute Credit Inquiries
Be Mindful of Your Credit Utilization
Increase Your Credit Limits
Set Up Automatic Payments
Have Your Utilities Reported
1. Check the Accuracy of Your Credit Reports
The first step in improving your credit score is to be aware of what’s on your credit history. There are three major credit bureaus, Experian®, Equifax®, and TransUnion®, and each has its own credit report and score based on your credit history. That means everyone actually has multiple credit scores.
Sometimes, you may find errors on your report that you’ll need to correct through a dispute process. If you find an error, you’ll have to file a separate dispute with each credit bureau since they’re run separately. If there are multiple errors on your credit reports, you’ll need to dispute each of those individually. You might consider working with a credit repair company to make things a little easier for yourself.
Due to derogatory marks having such a big impact on your credit score, removing errors can be one of the fastest ways to build your credit score.
2. Target the Areas You Need to Improve
Checking your credit reports from each of the three main credit reporting agencies is easy. Under the Fair Credit Reporting Act, you have the right to obtain a free copy of all three credit reports once each year. The government mandates that you can receive one free credit report each year, and you can easily access it at AnnualCreditReport.com. You can also check your credit through our free credit report card, which provides a snapshot of your credit and a letter grade for each of the factors that drive your score.
Once you receive a copy of your credit report, you will know which areas need improvement and where to start.
3. Fix Your Late Payments
Late and missed payments can stay on your credit report for seven years. These derogatory marks lower your credit score and make you appear as a bigger risk to lenders.
The credit reporting agencies don’t remove these items, but you may be able to talk a creditor into doing so. Creditors can forgive one late payment if you have a history of on-time payments and you call to discuss it with them. Removing repeated delinquencies may require a little more effort on your part.
4. Get Added as an Authorized User
You can become an authorized user for a credit card account if you have a friend or family member with a good credit history. Even if you don’t use the credit card, your credit reports will reflect the person’s credit history of on-time payments.
This is also known as “piggybacking” on someone’s credit. Should you do this, it’s important to remember that the other person and yourself are now linked. This means that using the card and missing payments can harm the other person’s credit score and vice versa.
5. Clear Any Outstanding Collection Accounts
Contacting your creditors about paying off your debt is a great way to raise your credit score fast. Make sure that they agree to remove the negative hit to your credit report if you repay it in full—and get it in writing. If this agreement isn’t made, there will likely be no impact to your credit.
After making an agreement with the collections company, request a pay for delete letter to have it removed from your credit report. A pay for delete letter is an agreement in writing stating that the creditor will have the derogatory information removed from your report.
6. Open a Secured Credit Card
Having and using a credit card can help you build credit, but it’s difficult to get approved for a credit card when you have a low credit score, which is where secured credit cards become useful. Unlike a typical unsecured credit card, where you are given a credit line based on your credit alone, you can open a secured credit card by depositing money, which becomes your credit limit.
For example, if you deposit $500, you will then have a $500 line of credit. Banks are more likely to approve you for a secured credit card because it’s less of a risk. Your payments on this card are reported to the credit bureaus, and if you make those payments on time, this can help you raise your credit score.
7. Dispute Credit Inquiries
Many credit inquiries are hard inquiries, and hard inquiries impact your credit score. In fact, a hard inquiry stays on your credit report for an entire year. While each individual hit is relatively small, it can push you over the edge from one credit score tier to one below it. What’s more, several hard inquiries over a short period of time can drop your score by a lot.
Like any other negative factor on your credit report, you can dispute credit inquiries. If you didn’t approve the inquiry into your credit, you may be able to get it removed. This could potentially increase your credit score, but only slightly.
8. Be Mindful of Your Credit Utilization
If you carry a large amount of debt compared to your available credit, your score can suffer. In fact, credit utilization accounts for 30% of your credit score. So, if your total credit card available credit is $10,000, and you’re currently using $8,000 of it, paying down those balances can increase your score.
Keeping your utilization rate at around 30% is recommended. That’s $3,000 in debt on a $10,000 available limit, for example.
9. Increase Your Credit Limits
As discussed above, a low utilization rate is ideal, and one way to improve your credit utilization is by increasing your credit limits. Using the $10,000 example, $4,000 of debt would be a 40% credit utilization ratio. If you increase your credit limit to $15,000, that same $4,000 of debt would only be 26%. But be aware, this could trigger an inquiry and that will impact your score as well.
10. Set Up Automatic Payments
Having a good payment history is one of the best ways to improve your credit score because your payment history accounts for 35% of your FICO score. One of the simplest ways to do this is to set up automatic payments. Simply go to your credit card company’s website, make an account, and set up automatic payments for the minimum each month.
This way, you never have to worry about forgetting your payment. You can also make additional payments during the month if you plan on paying more than the minimum.
11. Have Your Utilities Reported
Typically, your utilities are not reported to the credit bureaus, and not many people realize this. Each month, it’d be great to get positive payment history on your credit score for making these payments on time. You can do this by taking an extra step to have your utilities reported through different services. For example, Credit.com offers this as part of our ExtraCredit® service.
How Your Credit Score Is Calculated
When working on improving your credit score, it’s helpful to know how your score is calculated so you know which factors are the most important. You can then make a plan for where you should start. Here are the major credit scoring factors and how each one can impact your credit score:
Payment history: A history of overdue and missed payments may signal that you are a bigger risk to creditors. Thus, this factor has the greatest negative effect on your credit score. This makes up about 35% of your credit score.
Amount of debt: Debt is 30% of your FICO Score and also weighs heavily on other credit scoring models. This is also known as your “credit utilization,” and ideally, you want to keep it below 30% of your max credit limit.
Age of accounts: Creditors like to see a proven record of borrowing, utilizing, and repaying credit. If you’re new to credit and borrowing, there isn’t a lot of data to go on. This makes up 15% of your score.
Account mix: Making 10% of your score, lenders want to make sure you can handle both revolving and installment credit. This means credit cards that you continue to use after repaying and loans that are closed upon full repayment.
History of credit applications: Multiple hard inquiries on your credit may look like you are overextending yourself financially and appear desperate. This will lower your score. Credit inquiries make up 10% of your score.
How Long Does It Take to Fix Your Credit Score?
Most people want to fix their credit score as quickly as possible, but the length of time often depends on your situation. If you have multiple derogatory marks on your credit report, it may take months or even years for them to drop from your report. When trying to fix your credit score, it’s most beneficial to start with methods you can control, like making your payments on time, disputing errors, and trying to settle your debts with collection agencies.
FAQs
Below, we’ve answered some of the most common questions people have about how to quickly improve their credit score.
Checking Your Credit Report Is the First Step Toward Improving Your Credit Score
Your credit report is the best place to start if you want to improve your credit score. Your credit report will show you your account balances, any derogatory marks you may have, and hard credit inquiries. This will help you see where to start, and you can also find out if there are any errors on your credit report.
To get an idea of where you stand with your credit, sign up for Credit.com’s free credit report card today.