How to Build Credit (for Complete Newbies)

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Why is Your Credit Score Important?

If you haven’t noticed, your credit is important.

It helps when buying cars and houses, and it helps reduce your interest rates for practically any type of loan. Basically, a higher credit score makes adulting a little bit easier.

When you go to take out a loan, the lender will look at your credit score and determine if you are “worthy” of receiving a loan. Without an acceptable credit score, you can kiss your dreams of buying a car or house goodbye (unless you’re paying cash, but I doubt it because you’re reading this article).

And that’s great and all, but how does one actually *get* credit?

Factors That Affect Your Credit Score

Several factors affect your credit score; let’s walk through them one by one.

Payment History

Your payment history is the #1 most important factor in determining your credit score. Your payment history is precisely what it sounds like – your historical record of paying your bills on time. The more late payments you accrue, the worse your score will be.

Missing a single payment likely won’t affect your score much. But if you make it a habit, your score will sink fast.

Credit Utilization Ratio

Your credit utilization ratio is your amount of outstanding debt compared to your available balances. For example, if you have a credit card with a $100 limit and you have a $10 balance, your credit utilization ratio is 100:10, or 10%

It is best to keep your credit utilization ratio under 30%, but keeping it under 10% is an even better idea.

Credit History

Your credit history is different from your payment history. Your credit history is how long you’ve had open accounts and the average age of those accounts.

The longer your credit history, the better (more on this later).

Credit Account Mix

The credit score bureaus like to see a mixture of revolving debt (credit cards) and installment debts (car loan, mortgages, etc.)

Recent Credit Inquiries

The final factor in determining your credit score is your recent credit inquiries. When applying for a loan, the lender will make a hard inquiry into your credit. Hard inquiries negatively affect your credit score for a short time. Some companies will make soft inquiries, which do not adversely affect your score.

Paying Down Debt

As you can see, there are many reasons why you might have a low credit score. But the number one credit score killers are late payments and unpaid bills.

If you have a low credit score because of money mismanagement, you need to focus on living within your means and paying down your debt.

If you are spending more than you are making, you’ll never build a healthy credit score. Start by making a budget and sticking to it every month.

Next, you need to get rid of those outstanding balances.

Get out a pen and paper (or a handy-dandy spreadsheet) and make a note of all your remaining balances and their accompanying interest rates. There are two pretty widely accepted ways to tackled multiple balances. The first is called the debt snowball method – this method involves paying off the smallest balance first and then moving on to the next smallest balance. The second is called the debt avalanche method – this method involves paying off the card with the highest interest rate and then moving on to the next highest interest rate. The avalanche method makes more logical sense, but many people are motivated by paying off balances using the snowball method. Choose whatever method works best for you.

Ok, now that you’re well on your way to managing your money like a responsible adult, it’s time to tackle the task at hand: building your credit.

1. How Long Does it Take to Build Credit?

First and foremost, increasing your credit score takes time. You can’t jump your score 100 points in a week. It’s just not going to happen.

In fact, the length of your credit score is actually one of the factors in determining your credit score. In other words, your credit will build the longer you have active accounts. So grab a journal, some tea, and settle into the fact that you are about to start a process.

And while we’re talking about your credit history, if you have any old credit card that you never use, don’t cancel it! Unless there is an annual fee, there is no point in canceling an old credit card. Canceling a card could actually decrease your credit score because it shortens your credit history and reduces your available balances.

2. Choose One Account to Grow Your Credit

Remember how we talked about making a spreadsheet to see all of your outstanding debt? Pay the rest of those suckers off and don’t touch them! 

When you have it narrowed down to one account, use it each month on necessities and then: Pay. It. Off. Seriously, don’t carry a huge amount on the account. You will get dinged for looking like you can’t afford what you buy. You will also benefit from not using your entire limit each month. So instead of maxing out your card, start by utilizing maybe 25-30%. Don’t get stuck too much on this number. The point is to build good credit habits, not live within rigid walls of misery.  

If you don’t have an open account yet, here are some great options:

• Visa card through your bank. This is my favorite option because it’s pretty convenient to manage all your accounts in one spot. It is also super helpful when making payments. Most banks have an app to manage accounts quickly. Visa bank cards usually show up on that main dashboard, making it nearly impossible to forget about lingering balances. ‍
• Financing. A lot of big-ticket items come with some financing options. Financing a payment is a great option to build credit, especially if your bank isn’t quite ready to hand over a Visa. The most popular option is buying a car. However, if a car payment is not your thing, you can still find finance options for things like vet bills, snow tires, and glasses. Bonus points if you can use your financing plan to pay for other necessities. ‍
• Utilities Payment History. Some lucky tenants will have the ability to raise their credit simply by paying rent. Landlords are now beginning to collect rent through credit-building payment portals. But it’s not enough to just pay rent through the portal. You will have to create an account and okay the reporting of your payments. If your landlord does not offer this service, don’t worry! You can also build credit by reporting your utility payments through ExperianBoost. ‍
• Secured line of credit. If you still don’t have a viable option (since it’s hard to open an account with no credit), fear not! You can also open a secured line of credit with your bank. All it takes is a meeting with your bank representative and some extra money in savings. The bank will put a hold on your money and open a credit card utilizing that held money. A pretty standard starting point is $500. In that case, your secured Visa will have a $500 limit. It’s low risk for banks since they are essentially loaning you your own money, making it an excellent option for hard-to-lend-to-people. It’s essential to pay this card off regularly as well, though. Because even though it’s your money, the bank will profit on any interest accrued from late payments. 

3. Pay Your Bills

Have I mentioned how important it is to pay your bills?

Oh, I have?

Well, let me throw it out there again.

Once you have your account set up, keep it and all other accounts in good standing. Even if you are drowning in debts (hello student loans), most institutions will work with you on a payment plan to fit your needs. No one expects you to give up your food or rent money to pay your debts. But you need to call and address the situation. Ghosting your debtors will send you right to collections, which is a major blow on your credit.

Having debt does not necessarily hurt your credit, but having an account in collections always does. 

4. Opt Out of Credit Card Offers

Rumor has it that opting out of credit card offers can also raise your credit. Avoiding the letdown of finding out your mail is only junk AND raising your credit? It sounds like a win-win to me.

Even if this rumor isn’t true (which most of the credit bureaus claim), opting out of credit card offers will reduce your temptation to fall back into credit card debt.

To opt out of credit card offers, either call 1-888-567-8688 or go to www.optoutprescreen.com. 

5. Get a Credit Monitoring Service

This will do more than ensure you get your Equifax payout. A good credit monitoring service will give you an overview of the different aspects of a credit score and let you watch yours to make sure there is nothing sketchy happening. While some have a cost, you can also find some pretty great free options. (Looking at you, Credit Karma!)  

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The topic of credit can seem pretty looming, but it doesn’t have to be. And good credit is not an unattainable luxury reserved for the elite. You can start right where you are, one account at a time. 

And the best part?

Once you have your plan for better credit in place, your scores will continue to grow without your constant attention. Just be sure to check in on things once in a while to make sure you are still on track. So pick up that journal and outline your strategy.

You got this! Happy Building!

You might also be interested in: The Definitive Guide to Mortgage Refinancing