How to build credit: A guide for beginners (2024)

In the United States, building good credit is an essential step in your financial journey. The condition of your credit can impact many areas of your life — including your ability to secure affordable housing, jobs and auto loans.

Of course, building credit for the first time isn’t always a simple process. Many lenders and creditors want to review your credit reports and credit scores when you apply for a new account. If you don’t already have good credit established, you might have trouble qualifying.

On a positive note, there are strategies you can use to build credit for the first time. Below are some expert tips that can help you navigate the credit-building process, along with some advice on how to maintain good credit for the long-term.

Ways to build credit if you have none

Not every lender will be willing to work with you when you have no credit score and no established credit history. However, there are several ways to start building credit when you have none.

Credit card options

When you’re building credit for the first time, certain types of credit cards may be a better fit than others. In this situation, you’ll want to avoid applying for cards that require you to have a strong credit score to qualify for the account. Instead, look to the following types of cards:

• Secured credit cards: With a secured credit card, you make a security deposit with the card issuer in order to open the account. The security deposit is usually equal to the credit limit on your new card. The deposit reduces the risk involved for the card issuer. So, even with no previous credit history, you may be able to qualify.
• Student credit cards: Student credit cards can be another smart way to build credit from scratch, and both secured and unsecured options are available. Some of the best student cards feature no annual fees, sign-up bonuses and even rewards, making the accounts even more appealing.

Authorized user

Another way to build your credit profile is to become an authorized user on a family member or friend’s credit card.

This option isn’t available to everyone, but if you have someone who can add you onto their existing credit card account, your credit score might benefit. That’s because once you’re added to the account, the card information will appear on your credit reports and impact your credit scores.

Before you ask to become an authorized user on a friend or family member’s credit card, confirm that the account has positive payment history, meaning that the payments have always been made on-time. Becoming an authorized user on a credit card with late payments could hurt your credit score rather than help. Also, it’s best to become an authorized user on a card with a low credit utilization ratio versus a high one.

Credit-builder loan

Adding a well-managed installment loan to your credit report might also be beneficial when you’re trying to build or improve your credit. And even with no previous credit history, a credit-builder loan may be available to you.

This special type of installment loan is designed for consumers who are new to credit or working to fix and repair bad credit. Instead of having access to the loan funds right away, you’ll make monthly payments to the lender — usually for six to 12 months — and then receive the loan as a lump sum at the end of your payment term (minus any fees and interest owed to the lender).

Be sure to choose a lender that reports loan activity to all three credit bureaus, so that your on-time payments will appear on your credit reports and help build up your scores.

What is credit and how does it work?

“Credit” is a word that can be used in several different ways. Technically, credit allows you to borrow money from a lender or credit card company and repay the funds you borrow in smaller, more management payments, and/or in a lump sum. It’s a financial tool that can help you break down the cost of big ticket purchases like a home, vehicle, school tuition and more, over time.

In exchange for extending credit, creditors typically charge interest and sometimes fees to borrowers. So borrowers not only have to repay the funds, but also the additional charges from the creditor.

The term credit can also refer to the credit scores and credit reports you establish as a borrower. When you add positive information to your credit reports and build up good credit scores, creditors are typically willing to offer you more attractive interest rates and borrowing terms. Bad credit, meanwhile, could cause lenders to charge you high interest rates, high fees, offer you less attractive financing terms, and even limit your access to financing, certain jobs or home/apartment rentals.

Tips for building credit fast

Earning good credit doesn’t happen overnight.

“Your credit score is an important part of your personal finances and understanding what can change it is just as important. Maintaining a healthy track record by paying bills on time, keeping lines of credit open, and paying down debt will improve your score, but it will take time to build your credit history so don’t get discouraged”, says Russell Nelson, manager of credit card products at Navy Federal Credit Union.

If you’re starting from scratch, you’ll need at least six months of activity with a credit card or loan to receive your first credit scores. After that, it can take several years to achieve excellent credit. Yet depending on your situation, the following tips might help you speed up the credit building process.

• Always pay on time: Once you open new accounts, paying at least the minimum payment due by the due date each payment cycle is essential to the credit-building process. Payment history is worth 35% of your FICO Score. Not only does one late payment have the potential to cause severe damage to your credit scores, it can also stay on your credit reports for up to seven years.
• Pay attention to your credit card debt: If you opt to use credit cards as part of your credit-building strategy, it’s important to manage your new accounts with care. As a rule, you should aim to pay off your full credit card balance every month. If you allow credit card debt to accumulate on your accounts, not only do you risk wasting money in interest charges, you might also damage your credit score by increasing your credit utilization ratio.
• Avoid excessive credit inquiries: When you apply for new credit, the creditor will typically pull a copy of one or more of your credit reports. A record of this pull, which is called a hard credit inquiry, will appear on your credit reports. Having multiple inquiries for different types of financing in a short amount of time could damage your credit scores. So, it’s important to be selective about how often you apply for new financing and avoid seeking new credit in excess. (Tip: Checking your own credit is a soft credit inquiry and will never damage your credit scores).

Looking to build and improve your credit quickly? Here are some guidelines.

How to maintain good credit

Once you earn a good credit score, you will need to continue to put in effort to maintain it. Here are some tips to help you.

• Monitor your progress: It’s important to keep an eye on your credit reports from Equifax, TransUnion and Experian. Regularly checking your credit reports can help you make sure the information in them is accurate — both at the beginning of your credit-building journey and as you work to maintain the good credit you’ve built.
• Dispute credit errors: If errors appear on your credit reports or you ever become the victim of identity theft or fraud, it’s important to take action to correct those issues. The Fair Credit Reporting Act (FCRA) allows you to dispute inaccurate information on your credit report(s) with the corresponding credit bureau(s).
• Avoid closing credit cards: In general, it’s best to avoid closing credit cards unless you have a good reason for doing so (such as avoiding an annual fee for an account you no longer use). Canceling a credit card could increase your overall credit utilization ratio and might decrease your credit scores as a result.

Understanding your credit report

A credit report is a record of your history managing debt, including loans, credit card accounts and lines of credit. Credit reports contain detailed information regarding your payment history on these accounts, the dates you opened (and if applicable, closed) them, credit limits, loan amounts and other relevant details.

Here’s some additional information you can find on your reports:

• Your name, date of birth and Social Security Number.
• Your current and former home addresses and phone numbers.
• Collection accounts in your name.
• Bankruptcies.
• Hard and soft credit pulls.

Credit scores are based on the information that appears on your credit reports. If your credit reports show a history of on-time payments, low credit utilization, minimal credit inquiries and other responsible credit management, you’re likely to earn a good credit score.

But if your credit reports show a history of risky credit management habits such as late payments, collection accounts, bankruptcy, etc., your credit scores are likely to be poor.

How long does a bankruptcy stay on your credit report? Here’s what you need to know.

What is a good credit score?

Each creditor decides for itself what it is a good enough credit score to qualify for their products. However, FICO and Vantage share some general guidelines regarding what is considered to be a good or bad credit score.

Most credit scores range from 300 to 850. Based on this range, here’s what your credit score may say about your creditworthiness.

Frequently asked questions (FAQs)

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