How to build credit: 7 tips

If you’re trying to improve your credit scores, things may seem a little backward when you realize you actually need credit to build credit. 

When used responsibly, a credit card can be a valuable tool for building credit. But it may help to understand a few credit-building basics before you get started.

What you’ll learn:

• Building credit takes time, effort and responsible use. 

• One way to build credit is to use a credit card responsibly by doing things like making on-time payments every month and staying below your credit limit. 

• There are credit cards designed for people trying to build credit. They include secured cards, student cards and rewards cards like Capital One QuicksilverOne.

• Monitoring your credit can help you track your progress and understand how credit scores are calculated.

If your goal is to build credit, these seven steps could help you get started.

Credit might seem complicated. But learning how it works can help you plan ways to improve your credit scores. 

“A credit score is a number based on information contained in your credit report,” the Consumer Financial Protection Bureau (CFPB) says. “You don’t have just one credit score. There are many credit-scoring formulas, and the score will also depend on the data used to calculate it.”

That data can change based on when a credit score is calculated. But even though there are multiple credit-scoring formulas, the CFPB says they each use similar information to calculate credit scores.

Payment history is a major factor in credit-scoring calculations, accounting for 35% of FICO® credit scores. Payment history may include payments on credit cards, installment loans, mortgages and more.

According to FICO®, “Research shows that your track record of payment tends to be the strongest predictor of the likelihood that you’ll pay all your debts as agreed to.”

The CFPB says automatic payments and electronic reminders are two helpful ways to ensure you pay your bills on time. And if you’ve missed payments, the agency says, “Get current and stay current.”

According to the CFPB, “Part of your credit score depends on the amount of credit you have versus the amount you’ve used—known as the credit utilization ratio.” You can determine your credit utilization ratio by dividing the amount of credit you’re using by the credit limits on all your revolving accounts. 

FICO lumps credit utilization into a category it refers to as “amounts owed,” which accounts for 30% of its credit score calculations. 

“Keeping a low credit utilization ratio,” the CFPB says, “shows lenders you’re responsible and have available credit.” How low? Below 30%, the agency says.

Credit mix accounts for around 10% of FICO credit score calculations, the company says. And it’s an indicator of your ability to handle different types of loans, including revolving credit and installment loans.

A broad credit mix can improve your credit scores. But that doesn’t mean you should apply for a variety of loans. Part of the reason has to do with the credit applications themselves.

Applying for a new credit card or loan typically triggers a hard inquiry into your credit. The record of those inquiries can stay on your credit reports for up to two years.

And according to FICO, “Opening several credit accounts in a short amount of time represents a greater risk—especially for people who don’t have a long credit history.”

One way to avoid unnecessary hard inquiries is to see whether you’re pre-approved. If the process is similar to Capital One’s, checking won’t affect your credit scores.

Payments for bills like your cellphone, utilities and rent often aren’t reported to the credit bureaus. So they may not have any impact on your credit, even if you’ve never missed a payment. But that type of information, known as alternative data, can provide the credit bureaus with additional insight for assessing your creditworthiness.

But how do you give them the information? It involves a process called self-reporting. The name is a little misleading, because you can’t just call up the bureaus yourself every time you make a payment. But there are services that can help, sometimes for a fee.

By itself, keeping up with your credit won’t help you build credit. But it could give you an idea of where you’re starting and let you track your progress.

With a tool like CreditWise from Capital One, you can access your credit score and credit report anytime. It’s free and easy. And using it won’t hurt your credit scores, so you can check it as often as you want. The CreditWise Simulator can also help you explore the potential impact of your financial decisions before you make them. For example, it could simulate how adding new loans or credit cards could affect your credit scores.

You can also visit AnnualCreditReport.com to get copies of your credit reports from each of the three major credit bureaus.

Building credit takes time. You can typically expect to see credit scores between three and six months after you open a credit account. Keep in mind that the timing can depend on the credit-scoring model being used to calculate your scores.

Still curious about building credit? Here are answers to some frequently asked questions:

There are ways to actively build your credit history by accessing different types of credit cards and loans.

Credit-builder loans are designed to help borrowers improve their credit scores by demonstrating their ability to make on-time payments. For this reason, borrowers with credit-builder loans make payments before receiving the money.

Credit unions typically offer these loans, which may be available elsewhere, too. The loans start with the lender depositing a small amount—around $300 to $1,000—into a locked savings account. The borrower then makes small payments over a set time period, known as a term. Terms might last anywhere from six to 24 months. As the borrower repays the loan, their progress is reported to the credit bureaus. And when the term ends and all payments are made, the money is paid to the borrower. 

It’s possible that your deposit could earn interest if the lender puts the money in an interest-yielding account. Even so, it may not offset the interest charges and fees charged by the lender.

Length of credit history is the third most important FICO credit-scoring factor, accounting for 15% of its scores. It may seem odd that you have to first access credit to build credit. But there are credit cards designed for people with thin credit files to do just that:

• Secured credit cards: These cards look and function like most other credit cards. The main difference is secured cards, like those from Capital One, require a refundable deposit to open the account.

• Student credit cards: Capital One student credit cards offer cash back rewards and other perks. They may be an option if you’re enrolled in or admitted to an accredited university, community college or other higher education institution.

• Credit cards for fair credit: If you’re working on your credit, the Capital One SavorOne, QuicksilverOne or Platinum card could be an option.

If it’s not the right time to get your own credit card, you could see whether it’s possible to be added as an authorized user on the account of a trusted family member or friend. As an authorized user, you could get your own card and use it to make purchases. And if the account is used responsibly, that could help you build a positive credit history.

Building credit takes time, consistency and financial responsibility. By steadily making progress, you could set yourself up to reach your financial goals.

You can begin by finding out whether you’re pre-approved for a Capital One credit card. It’s quick and won’t harm your credit scores.