How to build credit: 8 tips

If you’re trying to build credit, things may seem a little backward to you. Because in most cases, you actually need credit to build credit.

But understanding some credit basics can help you get started. 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.
• One way to build credit is by applying for and responsibly using a credit card. 
• In some cases, paying other bills, like rent or utilities, can help boost your credit scores.

Credit cards can be a valuable tool to build credit. But you can build credit whether you have a credit card or not. One thing that’s universal, though, is the importance of practicing responsible credit habits. 

Take a closer look at what that means with these eight tips you can use to build your credit.

Credit can get complicated. But understanding a little about how it works can help you understand what’s making your credit scores go up or down. Here’s how the Consumer Financial Protection Bureau (CFPB) explains it:

“A credit score is a number based on information contained in your credit report,” the agency 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 a credit score. Those factors include:

• Payment history
• Credit age
• Credit mix
• Credit utilization
• Recent credit accounts

Learn more about what affects your credit scores.

Whether you’re starting from scratch or well on your way to building credit, it’s important to practice responsible habits. Here are a few good habits to keep in mind:

• 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 or using email or calendar alerts to help ensure you don’t miss a payment due date.
• 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.
• Consider more than minimum payments. It can be tempting to make only the minimum payment on your credit card statement. But that approach comes with a cost: interest. And interest charges can add up, costing you more 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.
• Be careful with credit applications. Applying for a bunch of credit close together 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 recent activity. And multiple hard inquiries could hurt your score.
• Monitor your credit scores and reports. One way to track your credit is by getting free copies of your credit reports from AnnualCreditReport.com. And there’s also CreditWise from Capital One. It’s 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 want.

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 build or establish credit:

• Student credit cards are exactly what they sound like: credit cards for college students and recent graduates. And some student credit cards offer cash back rewards and other perks.
• Cards for fair to average credit are for people who’ve begun to build credit but whose scores aren’t quite where they want them to be. When used responsibly, a good starter card could help you build credit.
• Secured credit cards are a lot like traditional cards, with one main difference: They require a deposit to open the account. That money acts as collateral, and it’s usually refundable. Beyond the deposit, secured cards look and function like traditional unsecured cards. 

Another way to build 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, but the primary account holder is ultimately responsible for payments. 

It’s important to know that credit card issuers aren’t required to report an authorized user’s activity to the credit bureaus. But if your issuer does, positive habits could benefit the authorized user.

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, such as missed payments, could reflect poorly.

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. Credit mix accounts for around 10% of what makes up credit scores. And it’s a reflection on your ability to handle different types of loans. 

Using the CreditWise Simulator could give you an idea about how adding new loans or credit cards could affect your scores. Remember, CreditWise is free for everyone. And using it won’t hurt your credit scores.

Credit-builder loans (CBLs) are a type of loan designed with a different goal in mind from that of traditional loans. Because of that, they work a little differently: Borrowers make payments before getting the money.

Credit unions typically offer CBLs, according to the 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. Terms might last anywhere from 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, according to the CFPB.

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, such as 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.

Bills for things 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 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, offers a service that can track these kinds of payments and add them to your credit report. So if you pay those bills on time each month and use the service, you may see a boost in your credit score.

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

Building credit can take time, and it requires financial responsibility and consistency. 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? Find a credit card from Capital One you can use to build credit. You can even find out if you’re pre-approved, with no harm to your credit score.