How to build credit so it sticks

Building credit is critically important. A healthy credit score will help when you need to take out large loans, such as a mortgage or car payment, and will help lower your interest rates.

The importance of credit also goes beyond your finances. Landlords, cell phone companies, insurance companies and even future employers will likely pull your credit score. So, how do you build credit? Follow these eight tips to establish credit and set yourself up for future financial success:

What you’ll learn:

• Check your credit score
• Become an authorized user
• Open a credit card
• Limit credit inquiries
• Mix up your types of credit
• Get a cosigner
• Request an increase to your credit limit
• Establish credit and good habits

1. Check your credit score

First, check your credit score. This initial check will let you see where you need to establish credit and how to build credit. Don’t skip this step if you’re starting to build credit from scratch.

You want to ensure that your credit isn’t inaccurate. You may also be surprised to find that you have a score because you were an authorized user on an account or for another reason.

You can check your personal credit information for free, and it takes just a few minutes. All three credit bureaus, Equifax, Experian and TransUnion, are required to provide you with a full credit report every 12 months.

A “Good” FICO credit score is any score of 670 or higher. A “Very Good” or “Exceptional” credit score is a score of 740 or higher. If you’ve checked your score and you’re doing well, jump down to the “establish credit and good habits” section in this post or check out how to score an even higher credit score. If your credit score needs significant improvements, don’t worry; we have tips below on building good credit.

2. Become an authorized user

An authorized user can make purchases on someone else’s credit card. An authorized user has a card with their name on it, but they’re on the same credit card account as the primary account holder. The primary account holder adds the other person’s name to their account.

There’s a lot of trust involved when someone becomes an authorized user. The primary user is legally on the hook for making payments. As an authorized user, you can only build your credit if your primary account holder makes their monthly payments. You need to trust the owner to make payments, and the owner needs to trust you to make responsible purchases.

If you’re trying to help a young adult establish their credit, this strategy is a simple way to do so. For example, if you have a child in college, you can add them as an authorized user on your card and establish an agreement that this is an emergency card.

Sit down and have a conversation about the times that your student can use the card. Can it be used if they need a rideshare late at night? Is the card strictly for fuel getting to and from school? As an authorized user your student can establish credit with your help as long as monthly payments are made.

3. Open a credit card

If you don’t have a credit card already, opening a credit card could be a great way to establish credit. However, getting accepted for a credit card with little credit can be difficult. Your application is more likely to be approved if you apply for a credit card at your current bank or credit union (if you’re in good standing).

Retail credit cards with low spending limits are also sometimes easier to get accepted for. You could also try applying for a secured credit card. On a secured card, you deposit money on the card to cover your credit limit.

It’s important to ease your way into the credit card world slowly. Open just one credit card and practice using it on smaller purchases. It’s easy to start spending up to your credit limit because you suddenly can access more money.

However, you’re trying to build your credit. That means you need to be able to make your monthly payments. A good rule of thumb: Only buy something on a credit card that you can pay for with a withdrawal from your bank account today.

Why is a credit card suitable for establishing credit? A simple low-interest credit card is a great way to establish credit because you can keep it for a long time. The "age" of your credit is how long you have had access to a line of credit, and it’s an important part of your credit score. In fact, it makes up 15% of your score.

4. Limit credit inquiries

Credit inquiries make up 10% of your credit score. A hard credit pull is the type of credit inquiry that impacts your credit score. Examples of a hard pull include applying for a credit card, applying for a mortgage or even a background check. If you have a lot of hard credit pulls in a short time frame, your credit score could go down temporarily.

Since you’re working on building your credit, be strategic about what you apply for and how often a credit pull is being requested. It’s also important to know when your credit is pulled and the difference between a hard and soft inquiry.

5. Mix up your types of credit

A history of various types of credit is vital to your credit score and will help you build your credit. Credit types make up 10% of your credit score.

Different lines of credit and loans require different levels of responsibility, so it’s important to have a mix of loan types. For example, someone who has successfully paid off an auto loan, made their monthly credit card payments and is working on their student loans has a better mix of credit types than someone who only has a credit card.

That said, a healthy track record is key to a good credit score. It’s important not to take out a new type of loan unless you can pay that loan. You also want to make sure that your debt-to-income ratio is reasonable. Too much debt can negatively impact your ability to take out new loans, such as a mortgage.

6. Get a cosigner

If you’re starting from scratch, getting a cosigner on a loan could help you establish credit. A cosigner with a good credit score could lower your monthly payments and get you a larger loan amount. When you co-sign a loan, you and your cosigner are legally responsible for making payments. It’s not uncommon for someone to get a cosigner on their first loan.

If you need a student or auto loan, consider getting a cosigner with good credit. Like an authorized user, this type of agreement requires a lot of trust. Both you and your cosigner's payment habits will impact your credit scores. An easy way to ensure no hiccups is to sign up for automatic payments. That way, both of you will sleep well knowing the loan will be paid on time each month.

7. Request an increase to your credit limit

Why is it important to have a high credit limit? It comes down to credit utilization. Credit utilization is a ratio that looks at the amount of credit you use versus the amount of credit available to you (your line of credit). An easy example is to look at your credit card. Say you have a credit limit of $10,000, and your average monthly payment is $1,200. Your credit utilization ratio on that card is 12%. This ratio is good. You want to strive for anything less than 30%.

Credit utilization is a big part of your credit score. It makes up 30% of your score. Request an increase on your line of credit to help your score. You can usually do this on your credit card’s site or app.

8. Establish credit and good habits

Make monthly payments on time

The most important thing you can do to build credit with a credit card is to make your monthly payments on time. Payment history makes up 35% of your credit score. A strong history of on-time payments will help you establish your credit. Set up automatic payments each month to ensure you never miss a payment. When you set it and forget it, you’ll easily build your credit score each month.

Watch your utilization

Keep an eye on your utilization and request an increase when needed. You can also help your credit utilization by making sure your reoccurring balance isn’t too high. A common myth is that you must carry a balance on your credit card month over month to build credit. You will not be penalized for paying your credit card in full monthly. You can lower your balance by paying in full. This will help you keep your credit utilization low.

Monitor your credit score for changes

As you work on building credit, see if you start seeing improvement in your credit score. Refresh yourself on how your credit score is calculated so you know what areas need improvement.