How to Build Credit

Learn how to find and improve your FICO score.

 

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Credit is a measure of how responsible you are in the eyes of lenders. Your personal credit score is calculated based on your borrowing habits, credit utilization ratio and payment history. Good credit can’t be acquired in a single transaction; it takes time to build your credit, but the payoff is worthwhile.

A good credit score is typically anything above 700, though scores can range from 300 to over 800. Good credit can save you money and stress when taking out a loan, applying for a credit card or making a big purchase. Here's how to build credit using different financial tools.

The Basics of Building Credit
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The Basics of Building Credit

If you have a poor credit score or want to start establishing credit, you can build credit by using a credit card or taking out a loan. There's no single secret formula for getting a great credit score, but there are best practices you can follow to increase your score over time.

How to Build Credit Using Credit Cards

Credit cards can be an effective tool for building credit. Here's how to establish your credit history with one or more than one:

  1. Apply and get approved for a credit card.
  2. Establish an on-time payment history by always paying bills on or before their due dates.
  3. Don’t get close to maxing out your credit limit. Pay off your debts each month to keep a low credit-utilization ratio.
  4. Don’t apply for more credit than you need.

How to Build Credit Using Loans

You can use loans to establish credit, as well. Take these steps to build your credit by borrowing money you need to achieve other goals:

  1. Take out an installment loan such as a car loan, student loan or home loan.
  2. Make regular, on-time payments.

Learn: What Is a Good Credit Score?

How to Use a Credit Card to Improve Your Credit History
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How to Use a Credit Card to Improve Your Credit History

If you’re starting with a blank slate, one of the easiest ways to build credit is with a credit card. Look for one with no annual fee and a low annual percentage rate. Once approved, you can start establishing a record and history of credit use. You want this history to reflect responsible credit use in order to get a good credit score.

Use your credit card at least a couple times a month. Using a credit card helps you build credit in a couple of ways. First, your credit history will show a consistently low debt-to-income ratio if you pay off your entire bill every month. Second, you can build a consistent record of making on-time payments if you pay your bill on time before the statement due date each month.

If you can’t get approved for a traditional card, look into getting a secured credit card. You’ll have to put down a deposit as collateral, but other than that, it will allow you make purchases and build credit just like an unsecured credit card.

If you’re in high school or college, student credit cards can be effective starter cards, as they usually offer lower rates, lower credit limits so you can avoid overspending, and even rewards programs.

How Financing or Leasing a Car Helps Build Credit
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How Financing or Leasing a Car Helps Build Credit

When you finance or lease a car, you’ll typically take out an installment loan. With an installment loan, you’re agreeing to pay back a loan with specified terms, interest and monthly payments. As you continue to make on-time payments throughout the loan period, you’ll be building installment credit.

Paying off the loan in full should have a positive effect on your credit score and FICO score. Your paid-off loan will continue to benefit your credit standing for 10 years. Though you might be able to pay off an installment loan early, doing so won’t have a significantly greater impact on your score, so you'll be better off continuing to build your credit through regular, on-time payments.

Find Out: FICO Score vs. Credit Score — What the Difference Means for You

How to Build Credit by Paying Off Student Loans
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How to Build Credit by Paying Off Student Loans

Few U.S. students are able to attend college without some sort of financial assistance — whether that be a loan, scholarship or grant. During the 2015-2016 school year, undergraduate students across the country received a total of $240.9 billion in government loans, grants, credits and deductions, according to the College Board. Students also borrowed an additional $11 billion from non-government sources.

As with any other form of credit, your credit score matters when applying for and paying off a student loan. Having good credit can make it easier to secure a private loan. Without it, you might need to get the help of a cosigner or government-assisted financial aid.

After you graduate and start paying off your loans, it’s critical to build your credit by making on-time payments until your student loans are paid off or forgiven. If you fail to pay your debt or miss too many payments, you can not only hurt your credit score, but you might also encounter serious government penalties and financial consequences.

Related: 15 Steps to Paying Off Your Student Loans

Building good credit isn’t going to happen overnight, but that doesn’t mean it’s not worth the effort. Establishing good credit shows credit lenders, landlords, banks, potential employers and more that you’re a person worth taking a bet on. That means you’ll be able to borrow with lower interest rates, avoid having to find a cosigner and be more likely to get the house, car or other big purchase you have in mind.