How To Build Credit: A Helpful Guide And FAQs

Your credit score is key to your financial success. Companies check your credit score for everything from cell phone contracts and credit cards to large purchases like your car or your home. Since so many items in your life are connected to your credit score, building credit plays a big role in your financial future.

Building good credit is a process that takes time and effort. Luckily, there are steps you can take to secure a better credit score for yourself without having to do a significant amount of heavy lifting.

Let’s take a look at how to build credit with and without a credit card. We’ll also talk about the credit essentials like the factors used to determine your score, the types of credit you can take advantage of and some tips on how to maintain your credit once you have it.

How To Build Credit With A Credit Card

Credit cards are the most common type of credit available. Using them responsibly helps build your credit history and boost your credit score. For credit cards to help improve your credit, you need to be aware of interest fees and payment dates and make your payments on time.

Let’s take a look at some of the common types of credit cards and how you can use them to help build credit and improve your score.

1. Use Unsecured Credit Cards

Unsecured credit cards are the most common way to build credit. It helps to think of unsecured credit cards as “traditional” credit cards – cards that do not require you to put down a deposit to qualify for approval. In addition to not requiring a deposit, unsecured credit cards tend to come with more benefits and higher credit limits.

You might not be able to qualify for an unsecured credit right away and might need a co-signer. Luckily there are also plenty of other options to get you started.

2. Apply For A Secured Credit Card

A secured credit card is a common option for first-time users. With secured cards, you make a small cash deposit upfront. Once you’ve made the deposit, you use the card to make regular charges and payments. By keeping a zero or low balance and paying your bills each month, you can establish a positive payment history.

Secured credit cards are designed to build your credit history and help you qualify for credit card opportunities and better rates going forward. This kind of card can also be used to help rebuild your credit after a misstep.

3. Open A Retail Credit Card

Specific retailers will often offer branded credit cards. These store cards may be easier to sign up and qualify for. While these cards are easier to obtain and come with in-store rewards, they often have higher interest rates or more stringent payment terms. Using these types of cards sparingly can help diversify your credit profile, but they should be used with caution.

4. Get A Student Credit Card

Active students can qualify for student credit cards, which can be used to build credit as a young adult with little to no previous credit history. Student credit cards are often subject to lower credit limits and higher interest rates. However, they’re also one of the most helpful and popular ways to get started building your credit history early, when you might not qualify for a traditional card.

5. Become An Authorized User

Becoming an authorized user on a family member’s credit card can also help someone without a long or well-established history build credit. It’s common for parents who want to help their kids build a credit history to add them as authorized users on their account. This can help those with limited financial experience build their credit score and credit history.

6. Ask For An Increase To Your Credit Limit

If you already have a credit card, you can ask your credit card company to increase your spending limit. Often this is easy to do online and might use a soft credit check versus a hard credit check, meaning it’s unlikely to lower your score even temporarily. 

Increasing your spending limit can help increase your credit utilization. This means you’ll be able to use a bit more of your available credit with less risk of a negative impact on your credit score.

How To Build Credit Without A Credit Card

There are several ways to build your credit outside of using a credit card. Let’s take a look at some of your options for establishing a credit history without using a credit card.

1. Use A Credit Builder Loan

Credit builder loans function as an alternative to credit cards. They allow you to build your credit history by borrowing and paying back a small amount of money in fixed monthly payments.

Usually, you borrow between $300 and $1,000 and your lender deposits it in an account. You then make regular monthly payments that may also include interest. Once you’ve paid off the loan, you get access to the account with the lump sum that you originally borrowed.

As you make regular, on-time payments, your lender reports to the three major credit bureaus, helping you build your credit history. These loans can be a great option to show lenders you’re responsible and open the door to other future borrowing opportunities. Be sure to compare options at your local credit unions, banks and digital lenders for the best terms and conditions on credit builder loans.

2. Report Your Rent And Utility Payments

You may also be able to establish credit by reporting regular rent payments and paying your utility bills. Some landlords participate in reporting services for items like your rent and your utility payments. If they don’t already, you can ask your landlord to report your payment history.

If your landlord chooses not to participate, there are a few services that allow you to report on your own. They might provide options to pay your utilities through a linked checking account or even through online payment systems like PayPal or Venmo. They then report your payment history to participating credit reporting agencies to boost your score.

Even if you report your rent and utility payments there’s a chance they won’t be reflected in your credit score. That’s because not every credit scoring model factors in rent payment history.

However, models like the VantageScore^Ⓡ and the latest FICOⓇ Scores do allow rent to factor into your score. As these newer scoring models become more popular, more people who are new to credit will be able to establish credit through less traditional routes.

3. Pay Existing Debt On Time

If you have current debt like a personal loan, auto loan or student loans, these could work to your advantage. This is because a portion of your credit score is determined by your credit mix, the several different types of credit payments listed on your report.

For example, let's say you took out student loans. Consistently paying them after graduation and even paying off student loans early can help you improve your credit. Any of your existing loans are reported to the credit bureaus. So, if you regularly pay your balances on time it helps you strengthen your credit score.

Missing a payment or making late payments on any loan can negatively impact your credit. So, make sure you can budget to pay off existing loans before taking on new debt.

4. Get A Credit-Building Debit Card

A newer option for boosting your credit is a credit-building debit account. In some ways, these accounts are similar to secured credit cards, since you’re using your own money to help with credit building. However, you won’t need to deposit the total amount of money upfront.

Terms can vary a bit from card to card, but generally, you’ll open a debit account and make a small minimum deposit (around $200). Once you hit that initial minimum you’ll receive a debit card you can use to make purchases.

To build credit, you continue to make deposits into your debit account to cover the cost of any purchases. Your payment history for the account is then reported to the credit agencies helping you to build credit with your everyday purchases.

Credit Basics For Building And Maintaining Your Credit Score

Now that we’ve touched on some of the ways you can work toward building credit, let’s take a closer look at how credit scores are determined and how you can use that information to your advantage.

What Does Your Credit Score Mean?

Your credit score is essentially a snapshot of your credit report and is represented in the form of a three-digit number that typically falls between the 350 – 850 range. A credit score above 700 is considered a good score which could open greater access to lending and credit opportunities.

The reason financial institutions such as banks, credit unions, online financial technology (“fintech”) companies and credit card providers look at credit score is to get a sense of how creditworthy you are and how well you manage your funds. This includes decisions about extending credit or denying your financing applications. It also influences what the terms of any offer (including down payments, interest rates, any special discounts or promotions, etc.) will be.

Who Determines Your Credit Score?

The three major credit bureaus – (Equifax^Ⓡ, Experian™ and Transunion®) – are responsible for tracking your credit history. They’ll also calculate your respective credit scores based on individual scoring models, which may differ by firm. Different financial providers may look to different bureaus, or multiple bureaus, when determining your creditworthiness.

What Are The Main Types Of Credit?

There are two main types of credit to be aware of, revolving credit and installment loans. Let’s take a look at how they differ and how each can help your credit score:

• Revolving credit: Think of revolving credit as a collective pool of funds that you can draw on over time, and that can be replenished (up to a maximum limit) via repayment. By staying within this limit and paying your creditors each month, you can continue to borrow from the credit line. Making payments on time and keeping credit utilization low helps improve your credit score over time.
• Installment loans: With installment loans, you receive a loan for a set amount of money, typically in the form of a lump sum payment. Over months or years, you make regular payments back to your lender to pay off the loan balance and any additional interest and fees. Common installment loans include personal loans and car loans.

How Is Your Credit Score Calculated?

According to FICO^Ⓡ, your credit score is determined by 5 different factors, each adding up to a certain percentage of your total score:

• Payment history (35%): The more consistent you are with payments, the better your credit score will tend to be. Alternately, if you have a history of late payments, it can negatively impact your credit score instead.
• Credit utilization/amounts owed (30%): The amount of your total credit limit you’re currently using matters. It gives creditors a sense of how responsible you are in managing the money available to you.
• Credit history (15%): The older your accounts, the better your credit score tends to be. In effect, it pays to have an established track record.
• Credit mix (10%): Creditors like to see a mix of lines of credit, as it gives the sense that you know how to manage different types of funding well. For example, they want to see both revolving credit and installment loans.
• Recent inquiries (10%): The number of times that you apply for new credit can affect your score. If you are constantly seeking out new loans, that can be a red flag to lenders.

Right now, most lenders will look at your FICO^Ⓡ Score to determine your creditworthiness. However, the VantageScore^Ⓡ model, developed by the three major credit bureaus, is also gaining in popularity.

How To Maintain A Good Credit Score

Establishing a good credit score can be difficult to achieve. Maintaining it can be even harder. Thankfully, there are several everyday tips and strategies that you can use to build and maintain good credit over time.

1. Monitor Your Credit

It’s important to keep a close eye on your credit history for discrepancies, errors and instances of fraud. Using the Rocket Money℠ app with a premium subscription, you can access your credit report to keep tabs on any potential hiccups and stay on top of reporting errors to improve your score.

You can even use the app to see the complete breakdown of your credit utilization and how it impacts your score in real-time. This can help you make decisions based on your past spending habits and help you decide when your score is strong enough to apply for a new card or loan.

2. Keep Your Credit Utilization Low

Your utilization ratio is a percentage of your overall available credit used over a set time. Keeping your utilization low shows lenders you aren’t too reliant on credit to cover your expenses. Utilizing a ratio of around 30% can help you slowly increase your credit score. If you have a credit limit of $5,000 total, this would mean only spending $1,500 (30% of $5,000) before paying off your balance.

3. Space Out Your Applications

Your credit score could drop if you apply for new lines of credit too frequently. If you need more credit, it’s helpful to focus requests for the same type of loan within a 2-week period. Or, you can space out your inquiries by about 6 months to minimize the impact on your score

4. Keep Unused Credit Cards Open

Surprisingly, keeping your unused credit cards open is beneficial, even if you’ve paid them off and don’t plan to keep using them. This is because your credit score and credit history favor a well-established track record. Having access to these accounts, even without tapping into them, can be seen as a point in your

Credit Building FAQs

Let’s take a look at some common credit questions that could have a big impact on your credit score.

How long does it take to build your credit score?

It takes roughly 3 – 6 months of consistent activity to calculate your credit score – assuming you’re actively making monthly payments to existing loans or opening credit accounts. Though the credit-building process takes some time and dedication, your efforts can be rewarded with better credit and loan terms and options.

Does paying car insurance build credit?

Since insurers aren’t lending you money, paying your car insurance won’t build your credit score. Generally, these types of payments won’t be reported unless you don’t pay them and your account is delinquent. One way to make monthly bills work in your favor is to make payments using your credit card. Then you can pay off your credit card bill in a timely fashion and improve your score.

Why did my credit score drop?

There are many reasons you might see a sudden drop in your credit score. These can include missing payments, submitting too many new loan or credit card applications or using too much of your credit utilization. There’s also always the possibility of fraudulent credit cards or loans being taken out in your name.

If you’ve noticed a sudden drop, or just want to keep an eye out, you can request a copy of your free annual credit report to take a closer look or monitor your credit via the Rocket Money app.

The Bottom Line: Start Building Credit Today

Building credit is a goal that takes time to accomplish. However, the sooner you get to work building your credit, the better off you’ll be down the road. Setting the groundwork early will help when you need to apply for a mortgage, personal loan, auto loan or student loan.

Ready to take control of your credit journey? Sign up for the Rocket Money^SM app today and set yourself up for success by tracking your credit score and spending patterns.