How To Build Credit: Common-Sense Ways To Reach The Top

Read Time: 5 minutes

Credit is an invisible force that packs a huge wallop, a financial tool that in the best case can help you cut costs, buy a home, finance a car, get a job, and in most states help lower insurance costs.

The catch is that bad credit can raise borrowing costs across the board. And – although it’s hard to believe – millions of people are simply outside the credit system.

Their credit standing is not good or bad, it simply doesn’t exist.

According to the Consumer Financial Protection Bureau, “approximately 26 million U.S. adults, one in 10, lack a credit record and are ‘credit invisible.’ Another 19 million Americans have a credit record but no score because their history is too thin or out-of-date.” 

So how do you build credit? Here are the basics you need to know.

What is Credit?

“Credit” essentially represents the willingness of others to lend you money. 

  • If you have credit you can borrow cash and easily pay for goods and services. 
  • The better your credit the lower your interest rate and borrowing costs.
  • As you establish credit, credit issuers – including stores, lenders, and credit card companies – will supply data to credit reporting agencies (CRAs) such as Equifax, Experian, and TransUnion. CRAs are largely interested in how much you can borrow, the amount outstanding, whether you at least make the minimum required payment each month, and whether you pay on time.

You can check your credit reports weekly and without cost from each of the three major CRAs by going to Look for errors and mistakes such as wrong names, addresses, and accounts – they can cut credit scores and make credit use more expensive.

If you see something wrong, contact the CRA.

What are credit scores?

Credit scoring services such as FICO and Vantage take credit report data and electronically compute a credit score – a number between 300 and 850. The higher your number, the better.

The scores are computed based on several factors. FICO, for example, looks at five major issues:

  • Payment history – whether you make payments on time and in full. (35%)
  • How much you owe. (30%)
  • Length of your credit history. (15%)
  • Whether you have recently taken out new credit. (10%)
  • Your credit mix. This is the balance between revolving credit (such as credit cards) and non-revolving credit (such as an auto loan or mortgage). (10%).

How To Get Your First Credit Account

When you first establish credit you’re at a disadvantage. You don’t have a credit history, you have yet to make payments, and all of your credit accounts are new. 

No worries. Everyone has to start somewhere and you can establish a basic credit standing with some speed. 

The first cards to consider – sometimes thought of as “beginner” accounts – are credit cards for gasoline and stores. However, without a credit history, these may be hard to get.

“If you have no credit history,” Experian explains, “you’ll likely need to apply for a secured credit card in order to be approved. Once you have your first card, use it to make small everyday purchases that you can easily afford.

Pay your balance in full each month to start building a history of on-time payments, showing lenders that you’re a responsible borrower.”

And what is a secured credit card?

According to Equifax, ”secured credit cards are a special type of card that requires a cash deposit – usually equal to your credit limit – to be made when you open the account.

This money then acts as collateral every time you make a purchase. If you fail to make payments on time or default on your debt, your lender can use the deposit to reimburse itself.”

There are other gateway strategies as well. For instance, you might be able to get a card with help from a co-signer such as a family member or friend.

Or, you might become an “authorized user” of someone else’s card. Be sure you understand your obligations with alternative strategies with these options because poor decisions could impact someone else’s credit standing. 

How to win with credit cards 

To win with credit you have to follow the basic rules.

First, know your credit limit. Your initial card may have a credit limit of $300 or $500. Whatever the number, always use less. For instance, if you have a $1,000 line of credit try not to use more than $300.

Second, always pay credit card bills on time and – if possible – in full. If you cannot pay in full, you must pay the required minimum. 

Third, if you pay in full every month you can avoid interest charges. This is important because credit card borrowing is not cheap. According to the Federal Reserve, in August 2023 the typical credit card interest rate was 21.19%. Yikes!

Fourth, late fees and over-limit fees are expensive. The Consumer Financial Protection Bureau (CFPB) estimates that credit card fees cost consumers $12 billion a year. Save money and pay early, such fees are an entirely avoidable cost.

Fifth, to get a better credit score you might want to let credit reporting agencies track bank account activity. This allows them to see spending that can improve credit scores, such as rent payments. 

“Prior rental payment history is overwhelmingly not reflected in the reports or algorithmic risk scores assigned to tenants,” said the CFPB last year. “Industry estimates of the coverage of rental payment history in the consumer reporting system range between 1.7% to 2.3% of U.S. renters.”

Sixth, you likely only need one or two credit cards. Don’t open new cards or additional lines of credit unless necessary, and remember that excess applications may reduce credit scores.

There’s no substitute for cash

Save money by putting aside cash every day. A few dollars here and there will add up.

Then take your cash, say $50 or $100, go to a nearby bank, and open a checking account. You can have paychecks directly deposited in checking accounts and thereby avoid check-cashing fees.

If you get 26 paychecks per year and pay $8 per check for cashing you can save $208 annually. 

Which bank? One that wants your business. Call around and ask if they have programs to help new clients. Some will waive fees and provide free checks.

How much should you save? As much as possible. Make regular weekly or bi-weekly deposits if you can. Once you have $300 to $500, it’s time to look for a credit card.

Peter G. Miller

Peter G. Miller is a nationally-syndicated columnist, the author of seven books published originally by Harper & Row (including one with a co-author), and has contributed to leading online sites and major print publications. He has appeared on numerous media outlets including the Today Show, Oprah!, CNN, and NPR.

Peter has been an accredited correspondent on Capitol Hill and a member of the White House Correspondents Association. He has served with the District of Columbia National Guard and holds both BA and MS degrees from The American University in Washington, DC. View Peter on LinkedIn.

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