How to start building credit — or rebuild it — with confidence

Building credit may seem like a huge hurdle if you’re trying to gain financial stability. It’s a tricky topic. That’s why we’re here to help you understand how to start building credit and why it can be the key to your financial future.

First, a quick definition. When people talk about credit, they are referring to your history of making monthly payments (sometimes this may include utilities, rent, and cell phone bills) and paying off debts as well as your credit score.

If you don’t have the best credit history or are just starting out, we’ll give you insight on how to start building credit and how to rebuild bad credit. We’ll also answer, “how long does it take to build credit?”, the basics of your credit score, and the benefits of having good credit.

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Why is credit important? Working on your credit is one of the hallmarks of good money management. Good credit is somewhat of a badge of honor — and with it comes multiple benefits:

• After you take the time to build your credit, you can qualify for a wider range of credit product such as credit cards, loans, and mortgage options. And, in some cases, with a good credit score, you could benefit from more favorable loan terms, like lower interest rates.
• Many rental companies will pull credit as part of considering rental applications, and good credit may increase the chances of getting approved, and in some cases require lower or no security deposits.
• Some employers run a credit check on prospective job candidates.

How is a credit score calculated? We mentioned briefly that your credit score reflects your history of paying off debts from lenders, but let’s walk through the basics.

Your lenders report your accounts and its performance to major credit bureaus on a periodic basis (usually monthly) and this history is used by credit scoring agencies to generate a credit score. The most common credit scores are FICO and Vantage scores, and they range from 300 to 850. The number is a measure of your perceived risk as a borrower to creditors.

A lower number means more risk and a higher number means less risk. Your goal is to get as close to 850 as possible. However, a more realistic goal for those with no credit or bad credit is to raise your score into the “Good credit” category. For more information, check out our post: What is a good credit score.

The factors that determine your credit score are:

• Payment history
• Credit utilization (the amount of your available credit that you are using)
• Length of credit history
• Mix of credit types (installment loans, credit cards, student loans, etc.)
• Recent credit applications (too many recent applications can be a red flag)

Two important financial factors that do not impact your credit score are employment history and your income.

Related: How your credit score is calculated

How long does it take to build credit?

Before you start an important financial task, you’re probably wondering how long it will take to do it. So, how long does it take to build credit? Good things don’t happen overnight, so it will take some patience and diligence. If you have no credit history, you can take steps to build it, such as opening a credit builder card (see the “How to build a credit score” section below). But know that it can take three to six months before a credit score is calculated.

If you have a low credit score or have gone through a recent bankruptcy, rebuilding your credit may also take time. It depends on how severe your financial hardships have been in the past – and how they impact your credit history.

Building credit takes a little effort, knowledge, and discipline, once you’ve established good credit it’s an important financial metric that can aid your success in borrowing money in the future.

A word of caution: Avoid opening multiple credit card accounts at once because you may think it will speed up the process. This won’t raise your credit score any faster and may hurt your score. When it comes to building credit, slow and steady wins the race.

How to build a credit score and credit history

Now that we’ve established that building credit is a long-term process, let’s look at some of the ways you can help establish good credit, no matter your financial situation.

So, let’s get to answering how to build a credit score based on a few scenarios:

1. How to build credit when you have none

If you’re a young adult new to credit or have recently moved to the U.S., you might not have a record of credit on file with credit bureaus.

If you’re wondering how to build credit for the first time and you don’t qualify for a credit card, it is possible to build credit without a credit card by:

• Opening a secured credit card. This is one of the best methods for establishing credit. A secured credit card is backed by a cash deposit from the user. The amount you deposit then serves as your credit limit – like a prepaid card. Responsible use of a secured credit card will improve your credit score over time.
• Opening a credit card with a co-signer. If you can’t qualify for a credit card because of your lack of credit history, apply for a conventional credit card with a cosigner like a parent or partner with good credit. This means that both you and your cosigner are listed on the credit card account and both of you are legally responsible for paying back the debt.
• Becoming an authorized user on a credit card.

2.  How to build credit with bad credit

Many people have experienced financial hardships, including bankruptcy, resulting in a poor credit score. While it can be challenging, there is a proven path back to good credit.

The first step to learning how to build credit with bad credit is to examine your current credit score. Many credit bureaus will offer this information as well as some banks.  

After you learn what your credit score is and need to boost it, the best course of action is:

• Paying your existing credit card and loan payments on time each month
• Disputing credit report errors
• Keeping revolving balances below 30% of your credit limit
• Do not close old credit card accounts or apply for too many credit lines. Both can negatively impact your credit history and debt-to-income ratio.
• Asking for higher credit limits while maintaining, or reducing, your balance can lower your overall credit utilization, or available credit being used. However, do this with caution because it could negatively impact your score if a “hard” credit inquiry occurs, or the additional credit is used.

Final note on how to start building credit

Building credit isn’t quick or easy, but with the right strategy and the right tools to help you, it can be done.  

Here’s the bottom line – building credit can take time and discipline to ensure that you’re paying balances on time.  Knowing what can help you build your credit can help you make better decisions for your financial future. 

Want more help with being good with money? Check out our other posts in the Spruce Resource Center.

This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.