7 easy ways to build your credit history—and why it’s important
You can score extra credit with these good financial habits.
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It’s an oft-cited problem: You may have trouble getting approved for a credit card or loan without a credit history—but you might not have a credit history without borrowing money in the first place.
Whether you’re new to credit or rebuilding after a financial setback, establishing credit is possible. It starts with understanding how credit works, applying for the right products, and learning how to responsibly manage credit. Here’s where to start.
What is credit?
Credit is the ability to borrow money with the agreement you’ll pay it back later, usually with added interest. As you use the credit card or start paying down the loan, the lender will report your account activity to agencies called credit bureaus. Many people know the three largest credit bureaus: TransUnion, Equifax, and Experian. They take your account information and organize it into statements called credit reports.
Certain entities—like lenders, landlords, employers, and others—are allowed to check your credit reports and your credit scores, and can make decisions based on that information.
“Building credit is all about how you manage existing credit accounts over a period of time,” says Katie Bossler, financial expert at GreenPath Financial Wellness, a national nonprofit service. “That means doing the things someone who’s loaning you money would want you to do—like making payments on time every month.”
A strong credit history can help you qualify for loans, get lower interest rates, and pass employment and landlord background checks. “It’s much more expensive to finance things when you have a lower credit score,” Bossler says. “But it can also impact things like whether you’re approved for a phone service and the insurance premium you pay. Many jobs also take a look at your credit for various reasons.”
Building credit takes time—about six to 12 months or longer—and a little bit of patience, Bossler says. Here are some methods for building good credit.
1. Make all of your payments on time
Before extending credit to you, a lender will want to be reasonably sure you’ll pay back the money as agreed. Your payment history helps them see how you’ve managed this in the past. To create a good payment history, focus on consistently making on-time payments every month. If you’re a day or two past the due date, don’t stress too much. You may have to pay a late fee, but lenders usually don’t report payments to the credit bureaus as late until they’re 30 days past due.
One way to ensure timely payments is setting an alert or signing up for automatic payments. “You have to know a little bit about yourself,” Bossler says. “If you’re not the most organized person with your finances, automating payments can help make sure you’re making them on time.”
You’ll typically have to set up autopay using a bank account. When the bill is due, the lender will automatically take the specified amount from that checking account. Some lenders, especially with student loans, even discount your annual percentage rate (APR) when you set up autopay.
2. Keep your credit utilization low
Your credit utilization is the portion of credit that you’re using compared to how much you have available, expressed as a percentage. To calculate your credit card utilization, take your card balance and divide by your credit limit. For example:
$1,000 balance / $5,000 credit limit = 0.2, which is expressed as a 20% credit utilization
Credit experts, including Bossler, generally advise keeping a utilization ratio of 30% or less. To keep your balances low, it helps to track which expenses you’re charging to the card and when the balance hits a certain limit. Try tracking your expenses, requesting a higher credit limit, and setting up balance alerts.
3. Create a good credit mix
Credit mix is the term lenders use to describe the diversity of your accounts. Lenders like to see that you’ve managed revolving debt (like credit cards) along with installment loans (like a car loan or mortgage). While this factor isn’t the most influential—it accounts for 10% of your FICO score, for example—it’s still important to your overall credit health.
Case in point: I have a good credit score and a solid history of paying credit cards and student loans on time. But when I applied for a car loan recently, the lender told me I was getting slightly higher APR offers because I had never managed this type of loan.
You don’t need to worry about applying for a bunch of different credit products unless you need them, Bossler says. But when you do add these accounts, it could help round out your credit history—as it did for mine.
4. Only apply for credit you need
Part of your credit score is based on “hard inquiries,” which occur when you officially apply for credit and the lender checks your credit history. A hard inquiry can temporarily ding your score, so if you’re shopping for the best deal, check whether the lender offers a pre-qualification. This tool allows you to check whether you qualify for the product and the rates you might get—but it doesn’t impact your credit.
5. Keep your accounts open
Credit-scoring models reward you for having accounts open for the long term. That’s because lenders can see how you’ve managed credit over time. While paid-off loans may eventually fall off your credit reports, consider keeping unused credit cards open. You’ll benefit from a longer average credit history and a larger amount of available credit. Just be sure the card isn’t costing you money with an annual fee or interest charges if there’s a balance.
6. Apply for a credit card
There are two main types of credit cards: secured and unsecured. Secured credit cards require you to put down a security deposit, which protects the lender in case you fall behind on monthly payments. Unsecured credit cards don’t require a security deposit.
Both types of credit cards help you build credit, though you may have to start with applying for a secured card if you’re new to credit or you have a spotty credit history. Once you open the credit card, aim to make on-time payments, keep the balance low, and keep the account open for the long term to grow your credit history.
7. Become an authorized user
Being an authorized user means someone—usually a friend or family member—adds you to their credit card account. You’ll get your own copy of the card to use for purchases, and the primary account owner is legally responsible for making payments.
“It could be a double-edged sword,” Bossler says. “If someone adds you on as an authorized user, the opportunity is there to build your credit as a result of using the card. But you need to make sure the [primary account holder] is paying the card on time every month.” Missed payments and large balances could hurt both your credit and the primary account holder’s credit.
“Pay your bills on time, keep the utilization on your credit card low, don’t apply for new credit you don’t need, and keep the credit that you do have open for that longer period of time,” Bossler says. “If you do all that stuff, you’re going to have good credit.”
Keep in mind that there are ways to improve your credit without using a credit card, too. You could, for instance, consider a credit-builder loan or get credit for monthly payments such as your rent and utilities.
Common Credit Card Terms
Annual percentage rate (APR): When it comes to credit cards, the APR is simply the interest rate you pay when you don't pay off the balance at the end of your billing cycle. APRs are expressed as a percentage and come in two main types. (1) Variable APRs can increase or decrease over time. (2) Fixed APRs will never change. The average APR is about 16%; you can check your cardmember agreement to find your rate. The credit card issuer may apply a different APR to your purchases, balance transfers, and cash advances. If you break the terms of the card agreement, you may have to pay a higher APR, called a penalty APR, for a certain time frame.
Credit limit: The maximum amount you can charge to your credit card. Once you hit the credit limit, you need to pay down some or all of the balance before the credit card issuer replenishes your credit line.
Grace period: When you have a credit card balance, the credit card issuer will charge you a minimum payment. You typically have a grace period of at least 21 days between the end of the billing cycle and the date your payment is due. If you pay off your purchases in full before the due date, then you won't have to pay interest on those charges.
Minimum payment: The minimum amount you can pay each billing cycle and still be in good standing. To calculate your minimum payment, the credit card issuer first determines your statement balance, which includes any outstanding balances, the transactions you made during the current billing cycle, and accrued interest. Then, the issuer typically calculates the minimum payment as a flat percentage of the statement balance, usually between 1% and 3%.