Building credit (or resurrecting a damaged credit profile) is not something that happens overnight or without effort. In order to have a solid credit profile, one that earns you the most competitive interest rates on applications, you must establish lines of credit and have a history of responsible use. But that's merely one of the steps involved.
"Because credit is so complex, building it takes time and patience, especially if you're trying to rebuild bad credit," says Colleen McCreary, chief people officer and financial advocate for Credit Karma. "Knowing which levers to pull can help put you on the right path to improving and maintaining your scores."
To help demystify the process, we asked McCreary and other leading credit industry voices to share their top tips for developing and maintaining a stellar credit profile. Here's what they had to say.
Understand the factors that contribute to your credit score
Before you start building your credit profile, it’s important to understand each of the factors that play into the overall score. There are five major contributing categories: payment history (paying on time); credit utilization (how much you owe against the credit line available); length of credit history (how long you have had the credit line open); types of credit (how many different types of credit lines you have, such as mortgage, car loans, student loans, and credit cards) and new credit (whether you’ve applied for a new loan or other credit recently).
“Knowing these factors and how they impact your score will help you on your journey to improving your credit,” says Brittney Castro, a CFP with Mint.
Open a secured credit card
In case this isn't obvious: You must use credit in order to build credit. One of the best ways to do this if you’re just starting out is to open a secured credit card.
These types of cards require an upfront cash deposit to open, which acts as collateral giving the credit card issuer a bit of security should you fail to make payments. For this reason, secured credit cards are far easier to obtain than standard credit cards if you have little to no established credit history. Opening this type of account can be a great first step on your credit building journey.
“Credit scores are all about assessing your level of financial responsibility,” says Freddie Huynh, vice president of data optimization for Freedom Financial Network. “Therefore, some history is required, and most preferably, that history comes in the form of how well you have repaid debt.”
When using a credit card to start building your credit profile, know that one card is plenty to establish repayment history, says Huynh.
Take out a personal loan
Similar to opening a credit card, taking out a loan and being responsible with repayment can help you establish a credit profile. Erik Wright, creator of the blog Real Life Investor Couple, recommends taking out a small personal loan from a local bank, even if you don’t really need the money.
“Put that money in an account and only use it to make the payments (on time) for the loan,” says Wright. “Pay extra on the principal balance as well, in order to pay the loan off faster. You'll pay a little bit in interest doing this, but the on-time payments and full repayment of the loan will increase your score.”
Do not depend on a debit card
Debit cards are very handy and they’re great if you prefer to steer clear of the temptation of a credit card, but just know that they do zero for building your credit profile.
“They do not factor into credit scores at all,” says Huynh. “This is because a debit card transaction is just a bank account transaction, whereas a credit card transaction is a lending transaction. Whenever you use a debit card, the amount is immediately withdrawn from the bank account to which it is tied. With a credit card, you are effectively borrowing money to pay for things, then receive a bill each month that you must pay.”
Get credit for things you’re already doing
Often consumers are surprised upon learning that making on-time payments for things like rent, cell phone bills, or utility bills does not feed into their overall credit score. That’s because traditional credit scoring formulas don’t tend to include these items, says Ted Rossman, senior industry analyst for CreditCards.com.
But there's a way to have these diligent payments count. You can sign up for programs such as Experian Boost (free), Perch (also free), and eCredable ($24.95 per year) to pull these and other existing accounts into your credit profile.
“Experian Boost claims an average increase of 13 points. Perch says some users have gone from no credit score whatsoever to the upper 600s, basically overnight. That’s incredible,” says Rossman.
Make debt payments more than once a month
Here's another hack familiar to those with the best credit profiles: Try making credit card payments weekly, or bi-weekly if you can, which will keep the overall balances low throughout your card’s monthly billing cycle.
“Each credit agency pulls your information at different times of the month. Therefore, it's better to make weekly or bi-weekly payments in order to keep your balances low,” says Blake Jones, financial planner for Pomegranate Financial. “For example, let's say you pay off your credit card balance of $10,000 on the 20th of the month, but the credit agency pulls your information on the 19th of the month. Even though you paid off your whole balance before your due date, your credit score may still be reduced because the agency pulled your information when you still had a $10,000 balance.”
Always pay bills on time
Speaking of payments, this should be a no-brainer, but just in case you didn’t already know this: the most important factor in your credit score is payment history. So if nothing else, make sure you’re getting those monthly payments made on time.
“Even one missed payment can hurt your credit score. So do everything you can to not miss a payment entirely,” says McCreary.
If you’ve had challenges with this in the past, look for ways to consolidate all your bill payments onto the same day to make it simpler to remember the due date. Many creditors will allow for customizing your due dates.
Become an authorized user on another person’s account
If you’re just starting to establish credit history and are hoping to bulk up your profile particularly quickly, ask a parent or partner who uses credit responsibly to add you as an authorized user on one of their accounts.
“Becoming an authorized user means you are added as a secondary account holder on someone else’s credit card. Assuming the primary account holder has a strong history of on-time payments and low credit utilization rate, this can have a positive impact on your credit as their account will appear on your credit file, thus helping to build and increase your credit score,” says consumer savings and family finance expert Andrea Woroch.
Add accounts strategically
While opening credit lines is important to build your credit profile, you also don’t want to go crazy on this front either (step away from the credit card applications), because applying for too much credit all at once can lower your credit score and make you look like a risky borrower.
Most applications trigger a hard inquiry, which temporarily trims a few points off your score. New accounts also lower the average age of your accounts, which is another ding, says Rossman of CreditCards.com.
“I’d suggest applying for credit no more than every six months or so. Be especially careful when you’re in the market for a mortgage as you don’t want to do anything to jeopardize your score during that sensitive time in your financial life. Try to hold off on applying for any other credit until after you close.”
Watch your mix of credit
Another important point on the topic of opening accounts—try to do so strategically because lenders ideally want to see that you’ve successfully managed different types of accounts.
“If you’ve only had revolving credit like credit cards, it might make sense to sign up for an installment loan such as a credit builder loan—basically a form of forced savings that reports to the credit bureaus,” says Rossman. “Or if you’ve only had installment credit, other examples of which include car loans and student loans, then maybe you should get a revolving account like a secured credit card.”
Here’s one important caveat from Rossman to keep in mind as you're doing this: “I wouldn’t want someone to go into debt just to build credit, but used smartly, these strategies can actually help you save money and build credit.”
Lower your credit utilization ratio by asking for a credit increase
Another major factor contributing to your overall score is your credit utilization ratio, which is the amount of credit you’re using relative to the total amount of credit you have available. Below 30 percent is often recommended by industry experts, although those with the best credit scores often keep their total credit utilization under 10 percent.
Looked at another way, if you have $20,000 in credit available on all of your credit cards combined and you’ve amassed $15,000 in charges, your credit utilization ratio is far too high, and that will negatively impact your score. But if you’ve charged just $2,000 of that $20,000, you’re only using 10 percent, which is far better.
A quick hack for improving your utilization ratio is to simply ask one or more of your credit card companies for a credit limit increase, which will nudge up the overall amount of credit you have available.
But do not go out and immediately use that increased credit, as you will be right back where you started.
“Increasing your available credit but not using it lowers your credit utilization, which can improve your credit score,” says Wright, of Real Life Investor Couple.
Keep old accounts open
This tip applies more to those who are repairing credit, rather than building it initially, but bear in mind that the length of your credit history has an impact on your profile—and one of the easiest ways to damage your score is by closing old accounts.
“One component of your credit score is your average age of credit. Lenders look at this as a way to understand how long you have been responsibly using credit,” says Brian Walsh, a CFP with SoFi. “Closing a card can lower your average age of credit and therefore negatively impact your score.”
Rather than closing old accounts that you may have paid off, consider keeping them open, particularly if they don’t require an annual fee. You might even use the credit card to pay a recurring monthly bill, suggests Walsh, and then set up autopay for that credit card, to pay the balance in full each month. Doing this not only keeps your card active but will also continue to create a payment history that helps build your credit further.
Review your credit report regularly and dispute errors
Do you regularly review your credit report? If you're not in the habit of doing this, you're making a big mistake. Here's why: There could be inaccuracies on your report. And what should you do if you spot one? Take immediate steps to correct it, of course, because these errors can result in lower credit scores. By visiting AnnualCreditReport.com you can access one free credit report each year.
Need further proof as to why this step is important? Here you go: According to an FTC survey, one in five people have an error on at least one of their credit reports. In addition, one in five consumers had an error that was corrected by a credit reporting agency after it was disputed, on at least one of their three credit reports. But wait, there's more still.
Slightly more than one in 10 consumers saw a change in their credit score after the credit reporting agencies modified errors on their credit report—approximately one in 20 consumers had a maximum score change of more than 25 points, while one in 250 consumers had a maximum score change of more than 100 points.
Are you getting the picture? Simply disputing inaccuracies can result in major points in your favor.
“Maybe someone else’s info got mixed up with yours, maybe you were the victim of identity theft or maybe a lender marked you as late even though you paid on time,” says Rossman. “Whatever it is, a mistake could be dragging you down, so review your credit reports regularly to ensure accuracy.”
You can pick and choose which of these recommended actions work best for you and your financial situation, but if there's one key point to remember, it is this: consistency.
“The most impactful thing you can do for your credit is to create some consistent financial habits that you maintain over time to help improve your score and remain in good standing,” says McCreary.