Now that you understand credit, why it’s important, and how it works, you’re ready to start building your credit score. Remember, your credit score is determined solely based on your history of interacting with credit and debt. That means that building credit requires getting a credit card or loan and using it properly.
Your credit score is composed of five factors: payment history, amount of debt (both total and in relation to your credit limits), credit age, new accounts, and credit mix. To build a good credit score and enhance your creditworthiness, you need to address each of those factors.
Your payment history is the most important part of your credit score, making up more than a third of your score on its own.
Unfortunately, this is also the hardest part of your score to influence in the short-term. With most loans and credit cards, you only get one bill per month, which means you only get one opportunity to make a timely payment. Even if you make multiple payments per statement period, your lender will only report the one on-time payment to the credit bureaus.
That means that the best way to influence this portion of your score is to focus on not missing payments rather than trying to make so many on-time payments that it boosts your score. Missing a payment or making a late payment can cause huge damage to your credit that takes months or years to recover from. If you never miss a payment, your credit score will increase naturally as time passes.
The best way to ensure you never miss a payment is to sign up for automatic payments through your lender or your card issuer. If you sign up to pay your card’s statement balance in full, you’ll never have to worry about paying interest. However, if you worry about overdrafting your checking account from paying the full balance, signing up for automatic payments for at least the minimum amount due is still a good idea to remain in good standing.
Making the minimum payment automatically means you’ll never miss a payment. It also doesn’t stop you from paying your bill in full if you have the financial resources to do so to avoid high interest rates.
The amount of money you owe, both in absolute terms and in relation to your credit limits, is the next most influential factor in determining your credit score.
When it comes to managing your payment history, you’re primarily playing defense, avoiding missed payments. With this aspect of your credit, you have the chance to play both offense and defense.
Of course, the best way to keep your debt low and credit score high is to avoid debt in the first place. If you don’t get loans and only use your credit card when you need them, paying their balance in full each month, you won’t have much debt showing on your credit report. This will help keep your credit score healthy.
Paying down your debt is a good way to give your credit score a quick boost. As you reduce your loan and credit card balances, your credit score will increase. You’ll also build a good payment history during this process, which will further boost your score.
Another trick is to reach out to your credit card issuers and ask for a credit limit increase. When you first get a credit card, the lender assigns a credit limit to your account. This is the maximum amount that you’re allowed to borrow using the card. The credit limit is usually based on your income and credit score.
Increasing the limit reduces your credit utilization, which helps with the “amount of debt” aspect of your score. For example:
If you have $2,000 in credit card debt and $5,000 in total credit limits, your credit utilization is 40%. If one of your card issuers boosts your credit limit by $2,500, your new credit utilization will be 26.67%, which is noticeably lower. Lower credit utilizations are better for your credit score.
If you’ve improved your credit or increased your income, your card issuer might be willing to increase your credit limit. Some will simply be willing to offer an increase based on you having the card for a few months, even if your credit and income haven’t improved.
Most card issuers make it easy to request a credit limit increase through your online portal.
The drawback of this strategy is that higher credit limits mean you can borrow more using a credit card, which can be dangerous if you struggle to manage your spending. If you worry that you’ll have trouble using your card responsibly if its credit limit is too high, you should reconsider this strategy and possibly reconsider using credit cards at all.
The age of your credit, and in particular the average age of your credit card accounts, is another factor of your credit score that is hard to influence in the short-term. The best way to improve this factor is to get a credit card, even if you don’t use it, as soon as you’re able to do so and to avoid opening new cards when you don’t need to.
Because the average age of your accounts is an important part of this aspect of your credit, you should avoid closing old credit cards, even if you don’t use them. If you opened a student credit card when you were in college, but don’t use it anymore, keep the account open. It will increase the age of your credit and help boost your score.
The one exception to this is credit cards that charge an annual fee. You do not have to pay fees or interest to build your credit and should avoid doing so whenever possible. If you have an older credit card that charges an annual fee and you don’t use that card, don’t pay the fee just to keep it open. Your credit score will recover if you close the account and you’ll save money.
Before you close a card, however, take the time to reach out to the card issuer. Many credit card companies offer many different cards, some which carry fees and some which do not. Most will be willing to let you change your account from one type of card to another. This can let you convert a card with an annual fee to a fee-free credit card.
If you do this, you’ll keep the old credit account on your credit file while dodging the annual fee.
On top of reducing the average age of your accounts, which dings your credit score, the simple act of applying for new loans and credit cards will reduce your score. This is called a credit inquiry or hard inquiry.
Credit inquiries remain on your credit report for two years and each one will reduce your score by a few points. There isn’t much to do here to improve your credit score other than avoiding applying for new loans and credit cards unless you have a good reason for doing so. If you avoid new applications for two years, you’ll get full credit for this aspect of your score.
In reality, most people will apply for loans once in a while. If you want to buy a car or a house, you’ll probably need to borrow money to do so.
To minimize the impact that these applications have on your credit, try to do your shopping around in a short period of time. Most credit scoring models will group similar applications for credit together into a single inquiry if they happen within a few weeks of each other.
For example, if you get quotes from three mortgage lenders over a couple of weekends, it will only count as a single inquiry on your credit report instead of three. If you wait a month or two between applications, each will show on your report separately.
Instead of avoiding all applications for credit, the realistic way to maximize the points from this portion of your score is to take advantage of these allowances for rate shopping and only apply for loans for a good reason.
Your credit mix plays a very small role in your credit score, so it isn’t something that you should prioritize. The way to improve your credit mix is to get different types of credit such as a credit card, auto loan, student loan, or personal loan.
The benefit of improving your credit mix is not even close to enough to make it worth applying for a loan that you don’t need. You should mostly ignore this aspect of your credit score. Your credit mix will improve naturally over time as you get different types of loans, but it’s not worth going out of your way to get different loans to improve it. Credit should only be used as it pertains to your constructive needs, not for the sake of the credit score.
One of the paradoxes of building credit is that you need access to credit, either in the form of a credit card or a loan, to get a credit history. However, if you don’t have a credit history, or have bad credit, few lenders will be willing to give you a loan in the first place.
These are some tools that you can use to start building or rebuilding credit, even if you’re struggling to find lenders who will give you an account.
A secured credit card is one of the best tools for building credit. Almost anyone can qualify for one, assuming you have some savings.
With a secured credit card, you have to give the card issuer a cash deposit, usually equal to your credit limit, before you can get approved for the card. For example, if you provide a $200 cash deposit, you’ll get a card with a $200 credit limit.
Because you’ve provided a deposit, the lender is taking on almost no risk by giving you the card. That means that almost anyone, even people with bad credit, can qualify for a secured credit card.
Once you get the card, it functions like any other credit card. You can use it to make purchases and get a bill each month. If you make your monthly payments, your credit score will slowly improve.
Depending on the card issuer, you may be able to graduate to an unsecured credit card automatically. This is a common pathway to getting your first credit card. If this happens, the card issuer will refund your security deposit. With other issuers, you have to close your account to get the deposit back. Either way, as long as you always pay your bill, you can get your security deposit back after you’ve had the card for a while.
There are lots of secured cards that charge huge fees, including account setup fees and annual fees. However, there are plenty of fee-free options. For example, Capital One and Bank of America both offer secured cards with no annual fee or setup fees. Discover’s secured card doesn’t have annual or setup fees and even offers cash back rewards.
A credit-builder loan is a type of loan designed to help people build their credit. In many ways, it’s less of a loan and more of a forced savings plan.
When you apply for a credit-builder loan, the bank disburses the amount of the loan into a separate bank account. You don’t have access to the account or the money in it but will start receiving a monthly bill for the balance of the loan, plus interest.
As you make payments on the loan, you’ll build up your payment history and improve your credit score. Once you pay the full balance of the loan, you’ll gain access to the savings account that the lender placed your money in. Some lenders skip the initial deposit to the account and instead direct your monthly payments into a separate account which they release to you once the amount is paid in full.
At the end of a credit builder loan, you’ll have a bank account with a balance equivalent to the amount you borrowed with the loan and a payment history on your credit report. In effect, you get to build credit through a monthly savings plan.
The drawback of credit-builder loans is that you wind up paying more than you get out of them. You have to pay interest on the loan, which isn’t included in the balance of the account that is given to when you finish the payment plan. You might also have to pay a setup or origination fee for the loan.
Because these loans have a cost, it’s usually better to use a fee-free secured credit card to build your credit. However, if you can’t qualify for a fee-free secured card or are willing to pay a fee to participate in a sort of forced-saving plan, these loans can be a good option.
You can also build credit with a one-click enrollment on Harvest Platform that automatically builds your credit for you by making payments on your behalf to a secured loan with no interest.
One of the most annoying parts of credit is that missing a bill payment, such as a utility bill or phone bill, can damage your credit as they go into collections but making these bill payments won’t help your credit at all.
Some companies have stepped in to help people get credit for the bills they have to pay each month, even if they aren’t credit card or loan bills. This lets people who haven’t gotten a loan or credit card build their credit history.
To get credit for paying your rent and utility bills, you need to use a third-party service. There are many options, each with pros and cons.
For example, services like RentTrack and PayYourRent will report rent payments to the credit bureaus. However, your landlord needs to sign up to accept payments through their services. If your landlord doesn’t use one of these services, you can’t use them to build credit.
It may be worth asking your landlord if they’re willing to start using one of these types of services. If your landlord has many tenants, you’re likely not the only one who wants to build their credit by paying rent, so your landlord may be able to make multiple tenants happy with the switch.
Experian Boost is a service operated by one of the major credit bureaus (Experian, Transunion, and Equifax). When you sign up, Experian checks your bank or credit union records and uses the information in them to find your utility, cell phone, and other bill payments. It then adds those payments to your credit history. It even includes some subscription services, like Netflix.
People with poor credit saw their scores rise in 87% of cases and 67% of those with fair credit saw increases. The service is free to sign up for and try, so there’s little risk to giving it a chance to see if it helps build your credit.
When you sign up for a credit card, the card issuer will often give you the option to add authorized users to your account. This can let a couple share a credit card account or give parents a way to give their children a card they can use in emergencies.
If you know someone with good credit, who you trust to maintain their payment history, you can ask to become an authorized user on one of their credit card account.
Many card issuers will report account information of authorized users to the credit bureaus. If you become an authorized user on someone else’s card, it can improve your payment history and credit utilization as those payments and balances show up on your credit report.
Keep in mind, that if the primary cardholder doesn’t manage their card well, it can damage your credit as a borrower. You should only become an authorized user of someone you know well and who you trust to manage their cards effectively.
Also, keep in mind that the person making you an authorized user is putting trust in you when they add you to the account. If they give you the card that comes in the mail, you could spend money on their account, leaving them on the hook for your purchases.
You can also ask your friend to make you an authorized user, but not to give you the card. This lets you get the benefits without exposing your friend to the risk that you’ll spend money on their account.
Once your credit improves and you can qualify for accounts on your own, your friend can remove you from their account.
Without good credit, getting a loan, even for a good reason like consolidating debt or buying a car you need for a commute can be difficult. Sometimes, you want to do these things quickly and don’t have the time that it takes to build credit.
If you know someone with good credit that trusts you, you can ask them to cosign on your loan.
A cosigner agrees to take full responsibility for a loan in the event that the person getting the loan fails to make payments. This reduces the lender’s risk and can help you qualify for a loan you wouldn’t otherwise get or secure a lower interest rate.
If you find a cosigner and get a loan, you can use the loan to build your credit. Make sure to make all of your monthly payments, and your score will increase as you build a payment history.
The benefit of this strategy is that it lets you build credit with a loan that you wanted to get anyway, rather than you taking steps to build credit in anticipation of useful loans. The drawback is that you need the help of someone else and that person must trust you enough to believe you will repay the loan.
Remember, if you miss payments or default on the loan your cosigner will be on the hook for the remaining balance of the loan. It’s essential that you make all of your required payments.
Checking your credit report is an important thing for everyone to do once in a while. If you’re trying to build your credit, you should be checking your credit regularly so you can see the effect that your actions are having on your credit score.
There are lots of ways to check your credit report. You can use AnnualCreditReport.com, which is a website authorized by the US government to let you get one free copy of your report from each bureau once per year.
When you’re checking your credit report, you might notice an error. For example, your report might list an account that doesn’t belong to you or a missed payment that you’re sure you submitted before the due date.
These errors are more common than you would think. According to a Federal Trade Commission study, roughly one-in-five, or 20% of people, have an error on one of their credit reports.
Removing these errors can help give your score a boost, especially if the incorrect information is something like a missed payment.
Each credit bureau has a different process for resolving errors on your report, so check with the credit bureau that’s showing the wrong information for how to dispute the error. Typically, you’ll have to send a letter to the company with your claim and any evidence you have that the information on the report is an error.
Once you understand credit, you’re ready to take steps to build it. If you have no credit or poor credit, the reality is that you’ll likely have to take steps to improve your score before you can start getting useful loans without a cosigner.
Things like secured credit cards and credit builder loans can put you on the path to having a good credit score and being able to get the loans you need. You can build credit automatically within Harvest Platform as well as manage all aspects of your personal finances.
TJ Porter is a Boston-based freelance writer who specializes in bank accounts, credit, and credit cards. He’s written for Bankrate, Credit Karma, MoneyCrashers, DollarSprout and My Bank Tracker, among others. In his spare time, TJ enjoys cooking, soccer, reading, and video games
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