taking notes on a book about loans

How to Build Credit

Your credit score is an indication of your creditworthiness. You'll want a good credit score for many different kinds of financial milestones in life.

Credit can be used for many things in life like getting a car, buying a home, or starting a small business. Lenders use a credit score system to easily check a potential borrower's creditworthiness before their application is approved. This means that in order to get approved for the credit you need, when you need it, you'll want a high credit score on your side. 

What is Credit? 

Credit is money available to borrow from a lender or other credit provider. You can get credit through a loan or a credit card. The credit is then how much you are approved to borrow and use from that lender or credit card. 

What is a Credit Score?

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 make rent payments on time each month or a lender for a mortgage who wants to know how likely you are to make your loan payments. 

Different Types of Credit 

Not all forms of credit work in the exact same way. In fact, there are 3 different kinds of credit you might end up dealing with. 

revolving credit graphic

Revolving Credit

Revolving credit is a line of credit that has a set amount of money you can borrow from. Borrowers can then use that allotted credit amount, pay it back, and still have that same credit limit to borrow from. This type of credit is often seen in credit cards that have a set amount on the card you can borrow from. Hence the term "revolving" credit because you can use that credit, pay it back, and use it again. 

graphic of calendar with installment credits

Installment Credit

Installment credit is a type of credit that is borrowed all at once at one time, and then repaid over a period of time through regularly scheduled payments. This type of credit is often seen in loans where the borrower takes out a certain loan amount, and then pays off that loan amount through a weekly or monthly payment schedule. Hence the term "installment" credit because the credit is paid back through installment payments. 

Need a Flexible Installment Loan?

graphic of faucet and water

Service Credit

Service credit is a type of credit that works differently from traditional ideas around credit. Service credit refers to the accounts you have with the different service providers that you use. Since you make regular monthly payments through these monthly bills, they are considered "service credit" and can help boost your credit score through on-time payments. 

How to Build Credit with a Credit Card

two credit cards, one black one blue

Your credit score builds as you interact responsibly with credit. Your credit score can also reflect how well you interact with bank accounts, credit unions, and paying bills on time. Responsibly using a credit card is one of the ways you can start building a strong credit history. 

Get a Good Credit Card 

Not all credit cards are created equally. Do some research and shop around for a credit card that fits your needs and doesn't have an interest rate that's too high. You want credit cards to build credit, not to get into debt. Generally speaking, credit cards from your bank or credit union will have better interest rates than credit cards from a store. 

Use the Credit Card Responsibly

Use your secured 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 cards 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. 

How to Build Credit without a Credit Card 

big x on top of two credit cards

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: 

Get a Loan 

Many loans can help you boost your credit score and get the funds you need faster. Installment loans, personal loans, and auto loans are some examples. These loans will give you the money you need and then create a payment plan for you. Make those loan payments on time and make sure those on-time bill payments are added to your credit reporting to positively impact your overall credit score. 

Pay Bills on Time

Everyone has monthly bills for things like rent, utilities, phone plans, insurance, and so much more. Make sure your bill payments are being counted toward your overall score. All of these bills can help build up your credit by paying all your bills in full and on time each month. 

How to Build Credit Fast

If you are in need of a better score right now, then you might be in a pinch to build credit fast. Building a great score is something that takes time. That's why you want to start making efforts to build up a good credit score now. But there are some things you can do to help the process along. 

Credit Utilization for Fast Credit Boosts

Ideally, you want to start thinking about building a healthy credit score sooner rather than later. That way, you'll have the score you need when you need it and not be left in a pinch. 

Start learning and utilizing credit today and make use of the tools you have available.

  • Use loans and credit cards responsibly
  • Pay all your bills on time
  • Keeps overall debts at a minimum

If these basic practices aren't getting your score where it needs to be fast enough, then you can also find a cosigner who does have a better score to help you get approved for whatever you need. 

Establishing Credit with No Credit History 

If you have no credit history yet, you might be 18 years old or have just never really used credit or paid bills before. By building your score as early as possible, you can be ready later down the road for things like buying a home, buying a car, rental applications, security deposits, and so much more. Even some jobs will want to know your FICO score with their background check. 

1. Get an authorized user credit card

One way is to become an authorized user on your parent's credit card. Then you can start piggybacking off of your parent's good score to start building your own. The primary cardholder is your parents, but since your name is also on the card you can reap some of the benefits too. 

2. Get a credit card

Get yourself a credit card and start using it responsibly. Don't overuse the card and remember how much money you actually have to spend. Then pay off the card each month so that you don't accumulate too much interest.

3. Make on-time payments

There are many bills you could start paying yourself if you haven't already. If you are young and still just starting out, try taking on one bill at a time. For instance, you could start with your phone bill or rent. 

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 up your score by making payments on your student loans right now. 

How Long Does it Take to Build Credit?

To build credit from scratch, it takes at least 6 months once you get your first card or loan. Then you will start to see your score on statement credit reports or a card issuers report. 

If you are trying to build a really great score 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 score to see a significant increase. 

In Conclusion, 

Scores show how financially responsible you are. That's why the practices you need to get a good score are similar to good general financial practices. Check out your score today with free credit reports. 

By living within your means, being responsible with your money and your borrowing, 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.