Whether you’re just starting out or recovering from financial hardship, these steps will help you get the credit score you want.

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Learning how to build credit the right way is essential. It allows you to improve your score over time by taking positive steps that show you are a low credit risk to lenders and creditors. There is no magic bullet or quick-fix solution that will instantly vault you from a 500 to a 700 FICO score. However, if you take the practical, measured steps that we outline below, you can start improving your score in as little as six months.

Let’s start with the basic formula for building credit:

  1. Choose a credit monitoring tool so you can track changes in your score.
  2. Get credit lines that get reported to the credit bureaus, such as secured credit cards or credit builder loans.
  3. Make your payments on time, since payments missed by 30 days or more will set you back significantly.
  4. Keep your credit utilization below 30%, meaning you never use more than 30% of any available credit line.
  5. Gradually add more accounts, spacing applications out by at least six months.

That’s it. That’s all it takes to build good credit. The process is the same whether you’re new to credit and have no score or you’ve had problems in the past that led to a bad score. Of course, you may need a little more explanation of what to do each step, so let’s break it down…

Step 1: Choose a credit monitoring tool

Choose a credit monitoring tool
If you want to improve your credit score, then it only makes sense that you need to know where you are. Although you can build credit without monitoring your score, you won’t be able to assess the impact of each step you take. And you’ll still go into credit applications blind. That’s not good.

So, if you’re serious about building credit, then the first step is to find a credit monitoring tool. There is a range of tools available – some free and some paid. In the steps that follow this one, we offer pro tips that teach you the best ways to use these tools to build credit.

Free credit monitoring

Free tools like Credit Karma and Credit Sesame provide a basic view of your score if you’re short on cash. This allows you to see where you stand and track changes over time. These free tools will also give you basic indicators of what’s keeping your score down.

Paid credit monitoring

Paid tools provide a more comprehensive view of your credit. They also provide better built-in recommendations to help improve your score. Unlike the free versions, good paid versions will help you file disputes with creditors to correct information in your credit report.

Debt.com has partnered with Smartcredit® to provide a platform that we think is one of the most comprehensive in the industry. Not only can you get full, 3-bureau credit monitoring, it also builds in a personal financial management tool.

So, it helps you build credit and budget all in one. This provides extra features that you can use to your advantage as you work to improve your score.


Step 2: Get credit lines that get reported to the bureaus

Get credit lines that get reported to the bureaus

In order to build credit, you need to build a credit history. That means having accounts that get reported to the big three credit bureaus (Equifax, Experian, TransUnion).  Each month, lenders and creditors report payment history and account status to the bureaus. As long as they report positive information each month about your usage, you build good credit over time.

Not all lenders report to all bureaus. So, if possible, check with the creditor to make sure they report to all three before you open an account.

There are four basic types of accounts that you can get with bad or no credit. Two of them you can get on your own, while the other two require someone willing to go out on a limb for you.

Accounts you can get on your own

Secured cards

Secured cards are a unique type of credit card that requires no credit check to open. Instead, you put down a cash deposit to open the account. If you put down $500, you get a $500 credit line. Then you use it as a normal credit card. The creditor reports the payment history to the bureaus.

Credit-builder loans

As the name suggests, these are small personal loans specifically intended to help you build credit. They also provide the extra benefit of helping you build savings, too.

You take out a loan and the funds are used to set up a Certificate of Deposit (CD). This builds savings with interest over a set time. At the same time, you make payments on the loan and build a positive payment history.

Accounts you can get with some assistance

Become an authorized user

One way to start building a positive payment history is to become an authorized user on someone else’s account. If you have a parent, spouse, family member or even a friend that’s willing to add you, you can use their credit card and build credit.

There are a few things to keep in mind. First, not all cards report payment history on authorized users, so make sure the account you plan on using does. Second, although you aren’t legally responsible for the debt, all payments need to be made on time or it could hurt your credit.

Find a cosigner

If you want to get a traditional credit card or loan but don’t have the credit score to qualify, find a cosigner. This can be a friend or family member that’s willing to be on the hook if you don’t pay back the debt.

In this case, unlike with authorized usage, your cosigner will be legally responsible for the debt if you don’t pay. However, given that you’re trying to build credit, you certainly should be making all the payments on time.

Step 3: Make all payments on time

Make all payments on time

Payment history is the single biggest factor that affects your credit score. It accounts for 35% of the “weight” in your FICO score calculation. This means that the best thing you can do to build credit is to pay your bills on time.

What’s more, not paying a bill will set you back significantly. The higher your score, the more missed payments hurt you. For example, if you’ve gotten up to a 680 and you miss a payment, you could see a drop of 60-80 points.[1]

So, avoid missing payments by more than 30 days. It’s important to note that creditors don’t report a payment that’s a few days late. However, you will have late fees applied immediately if you miss a due date.

Tip: Get a boost by getting credited for other bill payments!

If you don’t have many accounts to build a positive payment history, there’s another way to show you’re responsible with your payments. Experian Boost gives you an easy way to boost your FICO score by counting other bill payments.

You link Experian Boost to review your bank account transaction history. Payment history for utilities and telecommunications gets counted towards your score. And, since it boosts FICO 8, which is the score used by 90% of credit decisions,[2] it’s an easy way to show you make payments on time.

Smartcredit Pro Tip: Set up alerts when a payment is due

In the Your Account tab, you can change the Alert Settings to add a phone number. It will alert you to any payment you have due on a bill set up through Smartcredit’s Money Manager. This can help you stay on top of bills to avoid late payments.


Step 4: Keep your utilization ratio below 30%

Keep your utilization ratio below 30%

A utilization ratio may sound like a technical term, but it’s an easy concept to understand. It measures how much of the available credit line that you’re using. If you have a $1,000 with a $200 balance, your utilization ratio is 20%. If your balance goes up to $250, then your ratio goes up to 25%.

Credit utilization is the second biggest factor in scoring. It accounts for 30% of the “weight” of your FICO score. Anything over 30% utilization is bad for your score, and lower is always better. Any credit monitoring tool

Tip: You don’t need to carry balances over from month-to-month to build credit!

It’s a fairly common financial myth that having zero balances on your credit cards is bad for your score. It’s not. There is no part of scoring that requires you to have balances on your accounts to have good credit.

Having more open, active accounts in good standing is indeed good for your score. But those accounts don’t need to carry balances over from month-to-month.

In fact, paying off your charges in full every month is the best thing you can do for your score. This would mean you have a net utilization ratio of zero. That’s the best you can possibly achieve for that factor in scoring!

Credit monitoring pro tip: Monitor your utilization

Any credit monitoring tool makes it easy to keep tabs on utilization. The app will show you the percentage you’re currently using and alert you when that percentage is getting too high. If you see you’re close to 30%, you need to stop charging and focus on paying off some debt before you make any new charges.

Step 5: Gradually add accounts

Gradually add accounts

This step is important for two reasons:

  1. You want to make sure you can afford the bills for each debt before you take on a new one.
  2. Most new credit applications will create hard inquiries on your report. Too many within 6 months will hurt your score.

Avoiding too many hard inquiries

If you apply for credit and the creditor asks you to authorize a credit check, this will create a hard inquiry on your credit report. These hard inquiries affect your score – each inquiry will drop your score by a few points. They remain on your profile for about a year, but only affect your score for 6 months.

Stacking up too many inquiries in a 6-month window will hurt your score. And while new applications only account for 10% of the weight in scoring, it can still negatively affect you. So, you want to space out applications, usually by about six months.

Do secured credit cards and credit-builder loans create hard inquiries?

If you apply for a credit-builder loan, it does not create any hard inquiry. That comes straight from Debt.com’s partner Self, the leader in credit-builder loans.[3] So,  you can apply for these without affecting your score at all, even by a few points.

However, secured credit cards are another matter. Although these cards are billed as “no credit check required” there are some creditors that run your report.[4] If they do, it creates a hard inquiry. You should check with a creditor before you apply if you have any concerns about hard inquiries.

For the record, getting added as an authorized user will not create a hard inquiry. Applying with a cosigner will.

Credit monitoring pro tip: Check inquiries before you apply

Monitoring tools will all show you how many credit inquiries you have on your report. The tool will let you know when inquiries could still be affecting your score, so you know when to apply for your next account without damaging your score.

Make sure you can manage the debt!

Even if you can find a bunch of accounts that don’t require hard inquires, don’t sign up for them all at once. Taking on too much new debt at once is bad for your finances. You can find out that you can’t afford the payments. Then you’re stuck with missed payments hurting your score.

Always make sure you can comfortably afford the payments on new debt before you take it on. One easy way to check if you’re getting over extended with debt is to check your debt-to-income ratio. This measures how much debt you have relative to your income.  It basically tells you when you start to have higher monthly debt payments than you can comfortably afford to make.

Smartcredit Pro Tip: Prioritize the right accounts for payoff

If you’re carrying a few balances, you may want to pay them down before you apply for your next loan or credit card. Smartcredit’s ScoreMaster feature can help you prioritize your accounts and payments to achieve a certain score.

Simply set the amount you’d like to increase your score. ScoreMaster will tell you how much to pay on each of your accounts and by what date.


If you’re rebuilding credit, add this step

There’s an extra step that you need to do if you’re rebuilding credit after facing financial challenges. You should review your credit reports to see if any negative information is incorrect. This includes things like missed payments that you made on time, outdated account statuses, and collection accounts that are not yours.

If you find any items that you think are errors, you should dispute them. You can do so with either the credit bureau that issued the report or the furnisher that has the account. This process is commonly known as credit repair.

Smartcredit Pro Tip: Using action buttons to make disputes

Unlike free monitoring tools, Smartcredit will help you make disputes directly with the company that furnished the information. There are built-in action buttons in the Smart Credit Report® section that help you make disputes with just a few clicks.

Even if a negative item is correct, Smartcredit helps you request goodwill removals. If you’ve been a loyal customer to a company with a clean payment history in the past, they may simply update your information as a sign of good faith!

What about the other scoring factors?

Leverage credit options for low credit score candidates

If you’ve been totaling up the factors used to calculate your score, you may notice that we haven’t hit 100% yet. There are two minor factors that you can improve over a longer-term. They just take a little time to build.

Credit age

This measures the amount of time you’ve used credit products and accounts for 15% of your score. A long history of use shows that you have the experience, so you’re more likely to manage your debt effectively. It takes an average of the ages of each account you hold.

At a minimum, you want to maintain a credit age of more than 5 years. This simply takes time to do. Just make sure that you keep all your accounts open, active and in good standing to improve your age.

Tip: Don’t close old accounts!

If you have existing accounts, don’t close them simply because you don’t use them. Doing so, can decrease your age and hurt your score. Try to find a small recurring expense that you can use an old account to cover, so you can keep it active and open.

Credit mix (types of accounts)

The last factor considers the number and types of accounts that you have. It accounts for 10% of your score. Having a diverse mix of accounts – credit cards, a mortgage, an auto loan, and even student loans – expands your mix. This shows that you have experience managing different types of accounts and that you can manage multiple accounts at once.

This is another factor that takes time to build. You may want to build credit using the first five steps before you apply for larger loans like mortgages and auto loans.


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Reviewed By

Howard Dvorkin, CPA

CPA - Debt.com Chairman & Personal Finance Expert

Published by Debt.com, LLC