How to Build Credit

How-to-Build-Credit

Your credit score is an indication of how financially responsible you are or your overall creditworthiness. You’ll want a good credit score for many different kinds of financial milestones in life.

Explore this Credit Score Guide:

How to Build Credit

A credit score is a number used to show how responsible you are with your money. It particularly shows how good a person is at repaying credit they borrow. A credit score might be used by renters who want to know how likely you are to pay rent on time each month or a lender for a mortgage or car loan who wants to know how likely you are to make your loan payments.

Your credit score builds as you interact responsibly with credit. Credit is money you borrow and pay back later by using your credit card or by getting a loan. Your credit score can also reflect how well you interact with bank accounts, credit unions, and paying bills on time as well.

Here are some of the basic ways you can build your credit score.

1. Get a credit card and use it responsibly.

Use your credit card to your advantage. Pay off your credit cards each month and avoid letting them build up to where you are paying more in interest. Some people use their credit card to pay rent or pay for groceries and then pay off the credit card funds in full at the same time each month.

As you use your credit card and make payments on it regularly your credit score will grow. But be careful. If you get into credit card debt then your credit card will decrease your credit score.

2. Get a loan.

There are actually loans meant to help you build your credit that you can look into. When taking out a loan, borrowers usually receive a lump sum all at once. Loans often charge a percent of interest on the money you borrow. Then borrowers make regular payments to gradually repay the loan.

By making these payments in full and on time you can also build your credit score.

3. Pay bills on time.

Everyone has monthly bills for things like rent, utilities, your phone plan, insurance, and so much more. All of these bills can help you build up your credit by paying all your bills in full and on time each month.

How to Build Credit Fast

Building a great credit score is something that takes time. That’s why you want to start making efforts to build up a good credit score now. This is also why it’s important to learn about credit and using loans and credit cards responsibly when you’re young and start working, spending money, and paying your own bills.

The best way to build credit fast is to pay all your bills on time, bring your debts down, and regularly use and repay credit cards responsibly.

How Long Does It Take To Build Credit

If you are starting from scratch than it takes at least 6 months to build any credit at all once you get your first credit card or loan. So if you don’t have a credit score at all, it’ll take you at least 6 months after getting your first credit card to build up any credit score.

If you are trying to build better credit then this process can take a lot longer. You need to spend a good number of consecutive months repaying loans and making bill payments on time for your credit score to see a significant increase.

How To Build Credit Without A Credit Card

Many people don’t like using credit cards. One reason to avoid credit cards is if you have a hard time, not overspending. Credit cards can also make it difficult to keep a budget since they’re so easy to swipe for everything.

Luckily, you don’t have to have a credit card to grow your credit score. So if you have any credit card hang-ups, you can simply use any of these other methods to grow your credit score:

1. Pay off student loans.

Many college graduates come away with student debt. Use student loans to grow your credit score by paying off your student loans diligently.

2. Get an auto loan.

Auto loans are a great loan to use for building credit because they are relatively easy to get. You can also get a cosigner to help you get the loan.

3. Get a secure loan.

There are other types of secure loans you can get to help you build up your credit score. Many banks and credit unions offer secure, credit building loans. These types of loans are low risk because you make a lump sum deposit and then borrow from that amount to help build your credit.

4. Pay your bills.

Make sure your bill payments are being counted toward your overall credit score. You make these payments every month and they don’t involve borrowing any money you don’t have. So if you can use your on-time bill payments to build your credit score then do so.

How To Build Credit With A Credit Card

Credit cards are one of the easiest ways to build your credit score. Many places offer credit cards, and some credit cards can provide credit cardholders with special perks and benefits.

You can even find credit cards designed for people who want to build up their credit score. These secured credit cards are usually tied to something like your savings account.

To build credit with a credit card find a credit card with a low spending limit so you can easily qualify for it and so you can’t get yourself into credit card debt. You also want a credit card with a lower interest rate.

Then, use your credit card to make small payments that you pay off right away. By using this credit card practice your credit report will show a responsible borrower.

How To Build Business Credit

Personal credit and business credit are two very different things. Business owners need business credit to get loans to help finance their business. Your business credit is based on the financial history of a business. This can include business credit cards, loans, lines of credit, and trade from suppliers.

Things like opening a bank account for your business, getting a business credit card, paying suppliers, all of this information will impact your business credit score. To build good business credit you need to be responsible for all of your financial dealings and stay on top of all your payments.

This will show that your business is trustworthy and financially responsible which will help your company whenever you need a loan or line of credit in the future. It will also help show other businesses that your company is credible and trustworthy.

To build good business credit you’ll want to first:

1. Separate your personal and business finances.

Your business is going to need its own bank account and cards. Not only will this help you build a business credit score, but your business won’t directly impact your personal credit because these finances are separate from each other. You can also open a business bank account that is specifically designed for businesses.

2. Choose a business structure.

In order to keep your finances separate, you’ll want to choose the right kind of business structure. There are C-Corporations, S-Corporations, Limited Liability Companies (LLCs), and Limited Liability Partnerships (LLPs).

3. Get an Employer Identification Number (EIN).

An EIN is like the social security number for your business. You use your own social security card when conducting your own financial business. A company will use its EIN to conduct financial business for the company. You will need this identification number in order to work with the IRS and for taxes each year.

4. Establish good relations with vendors.

Most likely your business is going to need vendors. The trade lines you set up with these vendors will impact your business credit score, so be mindful of building a good relationship with suppliers.

How To Build Credit At 18

If you’re 18 years old you might still be learning what a credit score even is! You might not need a great credit score to buy a home at 18, but you should still start thinking about building credit now.

By building your credit score at 18 you can be ready later down the road for things like buying a home, buying a car, rental applications, and so much more. Even some jobs will want to know your credit score with their background check.

1. Become an authorized user on a parent’s credit card

One way to earn a good credit score as an 18-year-old is to become an authorized user on your parent’s credit card. Then you can start piggybacking off of your parent’s good credit to start building your own good credit.

2. Get a credit card

Even as a teenager you can get yourself a credit card and start using it responsibly. A secured credit card is a great option because you can make a larger deposit onto the credit card and then use those funds. This way your credit score won’t get in trouble by borrowing more money than you have because the credit card is essentially a prepaid credit card or debit card.

3. Make on time payments

There are many bills you could start paying yourself as an 18-year-old to start building credit. You could be in charge of your own phone bills or a car loan for your first car.

4. Start repaying student loans early

Many people have to take out student loans in order to pay for college. Many student loans allow you to put off payments until you are done with school. But you could use your student loans to start building credit by making payments on your student loans right now.

How To Build Credit As A College Student

College students can earn good credit in the same ways that anyone else can. As a college student, having a good credit score can help you get jobs, help you get into housing, and help you get loans for school.

One particular way they can start earning good credit is by paying back their student loans. The next biggest tip for college students looking to increase their credit score is to budget more strictly and avoid getting into any unnecessary debt. You can also use your rent payments to help build up your credit score.

When you’re going to school, finances might be really tight. Try using a prepaid debit card or a secured credit card to keep your spending in check while you go through college.

How To Build Credit With Bad Credit?

Many of you might be wondering how to build credit with bad credit. The difficulty in already having bad credit is that it can be hard to qualify for things that can help you boost your credit score.

This is why so many people with bad credit scores feel trapped. But don’t lose hope! You can still boost your credit score and get out of bad credit with these steps.

1. Make sure your current credit report is correct.

Your credit report could have some errors on it making your credit score worse than it actually is. And every little bit helps! Order a copy of your credit report from your credit bureau and go over everything on it to check for any errors they might need to correct.

2. Make payments a priority.

Sit down and set up a household budget that prioritizes making payments in full and on time. You might have to adjust other aspects of your life to do this but it’s worth it. Making on-time payments is the number 1 way to increase your credit score.

3. Use autopay.

Take advantage of autopay features to help you always make your payments on time. Autopay is a great solution for people who frequently forget to make their payments each month.

4. Bring your overall debt down.

The overall credit card and loan debt you have also has an impact on your credit score. So bringing down your overall debt is another good way to bring up your credit score number.

How Long Does It Take To Build Good Credit

Whether you have bad credit or no credit you might be wondering, how long does it take to build good credit? Increasing your credit score and maintaining a good credit score is a long term thing. You want to make these good credit practices a part of your normal daily life. This can sometimes mean lifestyle changes, but when you have good credit more doors are open to you financially which can really help you in the long term.

Overall, credit score changes take at least 3 to 6 months to show up on your credit report and calculate into your credit score. So start making changes now and expect to wait at least 3 months before you see any changes in your credit score.

But real change to your credit score is going to take more time than this. Maintain good credit practices always, and you should be able to see your credit score gradually lifting into a higher range over time.

How To Build Credit After Bankruptcy

Bankruptcy can happen for many reasons. Often, people file for bankruptcy because they have been overwhelmed by their finances to a point where they couldn’t recover on their own.

Bankruptcy offers a financial fresh start but not a financial clean slate. Your credit takes a severe hit after bankruptcy and it can take hard work and a long time to come out of that and build your credit up again.

1. Check your credit report regularly.

When coming out of bankruptcy you’ll want to keep a close eye on your credit report. Your credit score can’t afford any errors right now, so watch out for those and get them taken care of as soon as possible when errors do arise.

2. Get a secure loan and credit card.

Secure loans and credit cards are the most risk-free lines of credit you can use to build your credit score back up again.

3. Avoid debt.

When coming out of bankruptcy it’s a good idea to avoid debt or unsecured loans for a while until you can build your credit score back up again. It will also be difficult for you to get approved for unsecured loans until your credit score is higher again anyway.

How To Build Credit When You Have None

If you don’t have any credit at all, then you’ll need to have an open account somewhere for at least 6 months before you’ll get your first credit score. Then you’ll want to keep doing these good credit practices to help that new credit score grow.

You can start earning credit for the first time by getting a secured credit card a secure loan of some kind, or by being an authorized user on someone else’s card. All of the typical ways listed above can help you grow your credit score if you’re starting from scratch.

Credit Mistakes to Avoid

One of the biggest mistakes people make that negatively impacts their credit score is not having a working household budget.

It can be hard to stick to a budget, but finding a budgeting method that works for you is essential to keeping a high credit score. A budget will help you live within your means, help you not live paycheck to paycheck, and help you have enough to make all your payments each month.

Learn how to make a budget by reading our article, “Budgeting in 4 Easy Steps.”

Why You Want a Good Credit Score

Having a good credit score is an important part of your financial life. A lot of things can have credit score requirements—like getting into an apartment, applying for a car loan, a mortgage, any other kind of loan, getting a bank account, a credit card, or a better credit card with great benefits. Even your place of work might check your credit score when doing a background check during the hiring process.

Credit scores show how financially responsible you are. That’s why good credit practices are similar to good financial practices. By living within your means, being responsible with lines of credit and loans, and budgeting so you can successfully make all your payments each month you can enjoy the benefits of a great credit score and all the other benefits of being financially savvy and responsible.


Sources


NerdWallet. “How to Build Credit,” by Erin El Issa and Bev O’Shea.

NerdWallet. “What Is a Credit Score?” by Julia Kagan.

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