How to Build Credit: Essential Tips and Strategies

In 2024, the demand for consumer credit in the U.S. has significantly shot up. It seems the country has bounced back from the Covid crisis, and now, applying for credit is once again on people’s radar. However, sometimes, getting approved for favorable terms can still be a hurdle.

How to build credit if you’re just starting out? What is the best way to build credit? This guide is here to help anyone struggling with loan applications due to a limited or nonexistent credit history.

Building Credit with a Secured Card

Secured cards can be a great starting point for those who either have poor credit or who are looking to rebuild it. These cards require a cash deposit upfront, which sets your limit and reduces the risk for lenders because they can use it as collateral if you default. For instance, if you want a limit of $400, you’ll need to put down a deposit of this amount. Remember that companies have the right to keep the deposits if cardholders don't pay their bills.

Using a secured card responsibly—by making timely payments and keeping balances low—can help boost your credit score. While secured cards are a temporary fix until you can qualify for an unsecured card without a deposit, they serve their purpose well. Once you close the account, you’ll get your deposit back.

However, it’s important to choose the right secured card, so it’ll really help to build credit. First of all, make sure the card reports payment activity to all three major credit bureaus — Experian, TransUnion, and Equifax. These agencies track how people manage credit by compiling data on loan payments, card use, and account balances to generate credit scores. Typically, most secured cards do report to the bureaus, but if you end up with one that doesn’t, it’s just wasted time and money.

Additionally, look for cards with low annual fees and a deposit requirement you can afford. Maintaining a healthy credit utilization ratio is essential, though it can be challenging with a lower limit. While staying under 30% utilization is advisable, keeping it below 10% is even better for building your credit score. Want a particular example? If your limit is $300, you should aim to use no more than $90 at a time to stay under 30%.

Ask Someone to Add You as an Authorized User

Being an authorized user on someone else’s credit card account can give your credit a quick lift. As an authorized user, you’re allowed to make purchases with the card, but the primary account holder is fully responsible for all the payments.

Authorized users aren’t liable for any debt on the accounts, but they benefit from having the card’s payment history reflected on their reports. So, if you know someone who uses their credit card responsibly—pays on time and keeps balances low—asking to be added to their account could give your own credit score a nice boost.

For younger individuals, like teens, this can be the best way to build credit, as the minimum age for authorized users is often 13 years old. If you want to ask someone to add you as a co-signer, choose a trustworthy person. If you’re considering this route, choose someone you know and trust, ideally a close family member or someone who understands the arrangement, as their account activity will impact your score as well. Before you're enrolled as an authorized user, make sure to discuss how you'll manage the card and set up a plan to pay your portion if needed.

Get a Credit-Builder Loan

You might be wondering: “How do I build my credit without a credit card? Is it even possible?” Yes, it is. You can request a credit-builder loan.

A credit builder loan is a tool for people without a credit history that doesn’t require applying for a card. Before using it, you must determine the loan's period and sum. Rather than giving you the loan money upfront, you make monthly payments, which are reported to the credit bureaus. When the loan term is over, you receive the money, minus any fees. Essentially, you're paying into savings while building credit.

You can often find credit-builder loans at local banks or credit unions, and some large banks, like, Chase, Bank of America, and Wells Fargo, offer them. They're also available through online lenders like SeedFi and Self.

Be a Responsible Borrower

How to build a credit history with a credit card? There’s no quick way of doing it, as you must have a track record of making payments on schedule. Building credit takes consistency. To get a FICO score, you need at least one account open for six months or more, with a lender reporting your payment activities to the bureaus within the past six months.

Yet, some good financial habits can help you build credit quickly:

• It's crucial to consistently make on-time payments, even if it's just the minimum amount due. Making timely payments on your cards and loans will boost your score. Whenever possible, pay more than the minimum to show lenders your ability to manage credit responsibly.
• Always aim to keep your utilization ratio low. This refers to the percentage of your available credit that you're using. Ideally, you should keep your utilization below 30% across all cards to protect your score, and lower utilization is even more beneficial.
• Some people wonder, “How to build my credit fast?” and might think that opening several cards will speed up the process. Don’t do it! Opening too many new accounts in a short period can hurt your score. Submitting multiple applications in a brief timeframe can lead to a more substantial decline. Try to wait at least six-months between applications, while thoroughly researching the best card for your needs before applying. However, it doesn’t concern auto loans or mortgages, as such applications made within a short period of time are often treated as one and called "rate shopping.”
• It's also a good idea to keep accounts open unless there's a serious reason to close them, like high fees or poor service. Closing accounts can negatively impact your credit utilization and the average age of your accounts. Instead, consider downgrading of the card or transfer of the credit line to another card. Shutting down accounts can harm both your credit utilization ratio and the average age of your accounts, both of which are important elements of your overall credit score.

Always Review Your Credit Report

A credit report is a detailed record of your credit activity and is the basis for your credit score. It includes information on loan payments, card balances, and any past delinquencies. The score forecasts how likely you are to handle credit responsibly in the future, based on data from these reports. This will give you helpful clues on how to build up credit.

Many card issuers now provide access to FICO scores for free, even to non-cardholders, and some even offer free score monitoring, allowing broader access to these important financial tools.

Reviewing your reports from all three major bureaus —Experian, TransUnion, and Equifax—can help you spot any errors or inconsistencies that could harm your score. If you find inaccuracies, reach out to the bureaus immediately to correct them and protect your credit standing.