How To Build Credit In 5 Simple Steps

how to build credit

Do you need to know how to build credit?

Or why you should even care about your credit score?

Well, you’ve come to the right place!

Your credit score is very, very important. It forms the basis on which lenders and banks decide whether you’re worthy of a loan. Loans create leverage; allowing you to consider business ventures such as the BRRRR method of real estate investing.

Let’s talk about how to build credit quickly and efficiently. 

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Building credit isn’t as overwhelming as it seems. With the right habits and a few tools, anyone can build credit. The key is to know not only how to build it, but to keep your score high too. Since credit scores change multiple times a month, it’s important to keep up good credit habits.

Here’s everything you must know on how to build credit.

What is a Credit Score?

A credit score is a three-digit number that tells lenders a lot about your financial responsibility.

It’s a bit like a school report card, have you been good or bad (with your money) this year?

A credit score can range from 350 – 850. The higher your score is, the more financially responsible you are and the better loan terms and interest rates you’ll receive.

A low score may cause a declined loan application, or if you’re approved, higher fees and interest rates.

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    How Does A Credit Score Work?

    Your credit score is made up of many factors.

    While it’s a complicated algorithm, knowing the five factors that make it up can help you build a great score.

    • 35% Payment history – Your payment history is the largest part of your credit score. If you pay your bills on time, it helps increase your score. If you pay your bills over 30 days late, though, it can damage your score and your chances of securing future credit.

     

    • 30% Credit utilization – The more credit you have outstanding, the harder it is on your credit score. For the ideal effect on your score, limit your outstanding credit to 30% of your credit line or $300 for every $1,000 credit line. If you charge over 30% of your credit line, make sure you can pay some or all of it off before the due date to avoid a high credit utilization rate hurting your score.

     

    • 15% Length of credit history – The credit scoring model likes older credit accounts. It shows you are an established consumer and gives a better idea of your financial habits over time.

     

    • 10% New credit – Any new credit you’ve opened or even the number of inquiries on your credit report can bring your score down. Only apply for credit when you need it and be selective about the applications you submit.

     

    • 10% Credit mix – To optimize your score, mix up the types of credit you carry with revolving debt (credit cards) and installment debt, such as a car loan, personal loan, or mortgage debt.
    how to build credit

    How Do You Build Credit?

    Building credit is kind of a double-edged sword.

    You need credit to build credit, but no one will give you a credit account without a credit score.

    So where does that leave you?

    Use these 5 simple tips to learn how to build credit when you don’t have any:

    • Apply for a secured credit card – You’ll need a security deposit down which equals your credit line, but if you choose a card that reports to the credit bureaus, you’ll build a credit history with proper use.

     

    • Apply for a department store credit card – Most department stores have lenient qualifying requirements to open a credit card. Apply at your favorite store like Target and use your credit line to buy the items you normally buy. Pay your bill off in full each month and build a credit score.

     

    • Ask to be an authorized user – If you have close family members with good credit, ask if you can be an authorized user on one of their credit cards. Choose a card that the company will report authorized users to the credit bureaus. You don’t have to use the card to get the credit, though. As long as the owner uses it responsibly, you’ll get credit on your credit report.

     

    • Ask your landlord to report your rent – Rent doesn’t get reported to the credit bureaus, but it can if you ask for it. If your landlord isn’t willing to report it (it can get costly), use a service like Rent Reporters to report it yourself.

     

    • Sign up for Experian Boost Experian Boost is free, and gives you credit for things like utility bills, cell phone bills, and utilities. Pay your bills on time and you could boost your credit score.

    Can You Overcome A Bad Credit Score?

    If you’ve had credit for a while, but it’s not so good – you may wonder if you’ll ever overcome it.

    The good news is your credit score changes at least monthly, sometimes more often.

    Lenders report your latest balance and payment information often, which changes your credit score.

    With consistent on-time payments and low credit balances, you can improve your credit score! It won’t happen overnight and it may take a year or longer, but don’t give up!

    Whether you’re trying to build credit from scratch or overcome a bad credit score, your consistent good habits will be the key to success. 

    Continue your journey to financial literacy with our free 5-day email course!

    What Can You Do To Keep Your Credit Score High?

    You don’t just need to know how to build credit, you need to know how to keep it high!

    A few simple credit tips can help:

    • Pay your bills before the due date
    • Only charge what you can afford to pay off in full
    • Limit your credit applications to only those you absolutely need
    • Mix up your credit between revolving debt (credit cards) and installment debt (monthly loans)
    • Talk to your creditors if you have trouble paying your bill, don’t just ignore late payments
    • Don’t close old accounts, the age will help your credit history

    Final Thoughts – Everyone Can Build a Good Credit History!

    It’s important to know how to build credit. This way you’ll get the best rates and terms on loans!

    Your credit score is also important for things like insurance, utilities, and even employment sometimes.

    The higher your credit score is, the easier it will be for you in the long run. Many companies run credit just to see how financially responsible you are before they make any decisions.

    Make every decision you make a careful one, learn how to establish your credit and build a good credit score.

    Now you know how to build credit… let’s put it to good use!

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