How to build credit: 7 tips

There are plenty of areas where credit can influence people’s lives. But if you’re trying to build better credit, things may seem a little backward—in most cases, you actually need credit to build credit.

Understanding some credit basics can help you get started. So here are some ways you can build credit and use it responsibly.

Key takeaways

• Building credit takes time and effort. 
• To build credit, it’s important to practice good financial habits and monitor your credit routinely.
• You can build credit by applying for and responsibly using a credit card. 
• In some cases, paying other bills, like rent or utilities, can help boost your credit score.

You can build a credit history whether you have a credit card or not. 

However you want to do it, it’s important to practice responsible credit habits, like making payments on time each month. And monitoring changes to your credit score can help you track your progress.

Take a closer look at seven ways you could build credit scores.

1. Apply for a credit card

When you apply for credit cards, you’re asking for a type of open-ended loan from a lender. As your application is considered, the lender may take into account your credit history by looking at your credit report.

If you have a thin credit file—meaning you haven’t used credit much yet—there may not be a lot for a lender to consider. And that could make it more difficult to secure access to credit.

But some credit cards are designed with this in mind. Here are some common starter cards that, when used responsibly, could help you establish credit for the first time or build credit:

• Student credit cards are regular credit cards but for college students and recent graduates. Some student credit cards offer cash back rewards and other perks. Check with your lender for more details about eligibility and benefits.
• Cards for fair to average credit are for people who’ve begun to build credit but whose scores are not yet where they want them to be. When used responsibly, a good starter card—as these cards are sometimes called—may help you build your credit. And it may even have features like cash back rewards or no annual fee.
• Secured credit cards are a lot like traditional cards, with one main difference: They require a deposit. That money acts as collateral and is usually refundable. Beyond the deposit, secured cards function like traditional cards. And they often look much the same too. But keep in mind that credit limits on these cards may be lower, and they may not have rewards or bonuses.

2. Become an authorized user

Another way you could consider building credit is to become an authorized user on someone else’s credit card account. Authorized users have access to an existing credit card account and might even get their own card, though the primary account holder is responsible for payments. 

Credit card companies aren’t required to report an authorized user’s activity to the credit bureaus. But if they do, the credit account—along with its payment history—will appear on the authorized user’s credit report. This means that if the authorized user and the primary account holder are using the card responsibly, both could see a positive impact on their credit. In the same way, any negative actions—like missed payments—could reflect poorly. 

You might have heard of a similar option called co-signing. A co-signer is someone—often a family member or friend—who agrees to vouch for someone who’s applying for their own card. That includes repaying the debt if the primary borrower can’t. But it’s worth noting that major issuers don’t typically allow co-signers.

3. Apply for a special kind of personal loan

As their name suggests, credit-builder loans (CBLs) are a type of personal loan designed with a different goal in mind from that of traditional loans. And because of that, they work a little differently: Borrowers make payments before getting the money.

Credit unions typically offer CBLs, according to the Consumer Financial Protection Bureau (CFPB). But they 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. Borrowers then make small payments over a set period, known as a term, which is usually six to 24 months. When the term ends and all payments are made, the money is paid out. 

As payments on a CBL are made, progress is reported to credit bureaus. That’s how a CBL can help you build credit. But it’s important to take payment due dates seriously. Late or missed payments could end up hurting your credit, the CFPB says.

4. Make timely payments on other loans and accounts

Your payment history is one of the most significant factors that go into calculating your credit scores. 

So you’ll want to ensure you’re making timely payments on any existing debt, like mortgages, student loans and car loans. Having debt like this often means you’ve already established a credit history. So you can continue to build your credit by staying current on your loan and reducing debt.

Keep in mind that falling behind on payments for secured loans—like car loans or mortgages—can do more than affect your credit. That’s because the vehicle or property is used as collateral. And if you fall behind on payments on a secured loan, you could risk losing the collateral.

And don’t forget that payment history is only one of several factors that affect your credit scores. Your credit mix is another. It’s a measure of how you’ve handled different types of loans, including revolving credit and installment loans.

5. Look for ways to add rent or utility payments to your credit reports

Regular bills, like those for 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 there may be ways to have your rent or other bills added to your credit report. For example, Experian®—one of the three major credit bureaus, along with TransUnion® and Equifax®—offers a service that can track utility bills and cellphone payments and add them to your credit report. So if you pay those bills on time each month, you may see a boost in your credit score.

6. Build and maintain good credit habits

After you’ve started building credit, it’s still important to practice responsible habits. Here are a few good habits to keep in mind throughout your credit journey:

• Make payments on time. Credit-scoring companies FICO® and VantageScore® both say payment history can be a significant factor in determining your credit rating. You might consider setting up automatic payments to ensure you don’t miss a payment due date. You could also use scheduled emails or calendar alerts to remind yourself. 
• Create a budget. Creating a budget to compare your income to expenses is a key step to reaching your financial goals. Seeing where your money goes each month could help you set aside loan or credit card payments before you start spending each month.
• Exceed the minimum payments. It can be tempting to keep making only the minimum payment you see on your credit card statement. But ultimately, it’s counterproductive. Those minimum payments come with a cost—interest charges. And interest can add up, costing you more money in the long run and making it harder to pay off debt. Take it from the CFPB: “Paying off your balance each month can help you get the best scores.” 
• Stay under your credit limit. Maxing out your card’s credit limit could reflect negatively on you and your financial situation. Experts recommend using no more than 30% of the total credit you have available. If you’ve been using your credit card responsibly, you could consider requesting a credit limit increase. A credit limit increase could help you lower your credit utilization ratio—or the amount of credit you’re using compared to the total amount you have.
• Be careful with credit applications. Applying for a bunch of credit at once isn’t likely to help you build credit any faster. In fact, it could make your financial situation look worse than it is. That’s because credit scoring takes into account your recent activity. And multiple hard inquiries could hurt your score.
• Monitor your credit scores and reports. Once you start to build credit, it may be a good idea to keep track of where you stand. You can get free copies of your credit reports by visiting AnnualCreditReport.com. And there’s also CreditWise from Capital One. CreditWise is free and easy to use, whether you’re a Capital One customer or not. And it won’t hurt your scores, so you can check it as often as you like.

7. Consider a lending circle

A lending circle is made up of a group of people who agree to lend to each other. Members contribute to a fund on a monthly basis and take turns collecting the pooled funds.

Lending circles can be informally structured—like those made up of friends or family members. Or they may be organized by nonprofits or online lending platforms. But keep in mind, lending circle members build credit only if the organization reports the activity to the credit bureaus, which isn't always the case.

Be aware that this type of lending can come with higher fees and higher interest rates than a traditional loan. And if you run into trouble paying back your loan on time, you might not get as much support as you would from a traditional bank.

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

Why is credit important?

Credit is an important financial indicator that shows lenders your ability to repay debts. Your credit will come into play when applying for things like credit cards, mortgages, auto loans and more. And improving your credit score can help you qualify for better interest rates and loan terms.

What is a good credit score?

Each credit model uses different factors to assess your credit. A good credit score can vary depending on the model. FICO categorizes “good” scores as falling between 670 and 739, while VantageScore’s “good” scores range from 661 to 780. But typical scores can be better than good. The most popular FICO and VantageScore credit score ranges go as high as 850.

How long does it take to build a good credit score?

Building credit takes time. With patience and determination, you can typically expect to see your first credit scores appear somewhere between three and six months after you open a credit account—though this will largely depend on the credit-scoring model being used to judge your credit. It might take longer to build an excellent credit score.

Building credit can take time, and it requires financial responsibility. By steadily making progress, you may set yourself up to one day reach bigger financial goals, like buying your own home.

Ready to get started? Learn more about Capital One’s credit-builder cards. You can even find out if you’re pre-approved, with no harm to your credit score.