How to Build Your Credit

If you want to purchase a house or a car, or get approved for a loan, you will need to make sure you have established good credit. The main decision-making driver for credit grantors is your credit history. The biggest factor in determining whether credit is good or bad is an individual’s credit score. However, along with credit score, creditors also are interested in your credit history, or more simply put your “story.” Some things that can impact your credit history are paying bills in your name or length of employment.  The better your credit is, the lower your interest rate will be and the more likely you will be approved for a higher loan amount (this is combined with your income, too, of course). How, then, does one establish good credit?

  1. Open a credit card. If you have little to no credit history it may be difficult to get approved for a credit card; however below are a few options for people with fair credit and limited credit history.
    • Platinum Credit Card from Capital One – this card is designed for people with an average credit score and limited credit history. It has no annual fee and no rewards.
    • QuicksilverOne from Capital One – this card is designed for people with an average credit score and limited credit history. It offers 1.5% cash back rewards, but the annual fee is $39. Credit cards with annual fees are generally only worth it if you believe you will spend enough to generate more than the fee amount in rewards (i.e. would need to spend over $2,600 a year to receive over $39 worth of rewards at the 1.5% cash back rate).
    • Department store or retail store – one of the first credit cards I got years ago was at Express, the clothing store. At the time, they had a program designed for college students and they used my college ID in the process. I only got approved for $150, but it was a good way for me to build credit history. Plus, there were coupon incentives. The card could only be used at Express stores, but I put all my Express purchases on the card and paid them off in full in order to help establish good credit.
    • Banks – it may be beneficial to sit down with someone at the bank where you hold your checking or savings accounts to see if they have a card designed for those with limited to no credit history. Banks are a good option because they have access to see your account balances and know your income based on direct deposit or cashing your paychecks.
    • Secured Credit Cards – a secured credit card is a credit card that requires a “security deposit,” which is set up like a savings account used as collateral against your line of credit. The deposit amount is generally a percentage of the line of credit you are approved for. There are several different options for secured credit cards.
  2. Pay your bills on time. It is important to never miss a payment on any bills you have and to always make payments by or before the due date. Credit grantors oftentimes will check payment history because if you are late paying your bills, or do not pay them at all, it may be a sign you will be late paying your credit card or other type of loan back or won’t pay it at all. So, whether you have a credit card already or if you just have regular bills such as rent, car insurance, or phone bills, always make sure to pay them on time. Paying late or missing payments will negatively impact your credit score.
  3. Exhibit stability – some grantors look at things like length of employment history, how long you’ve worked at the same place, length of time at your address, and assets you have (i.e. investments, savings, do you own a house/car).
  4. Keep balances low – if you do have a credit card, you will want to keep the balance you carry low or just pay it off in full each month. This demonstrates to creditors that you do not charge more than you can afford.
  5. Be careful closing credit cards – when you have limited credit history, you want to be cautious about closing credit cards because closing your older cards makes it look like your credit history is shorter than it truly is when it falls off your report (this doesn’t happen until 10 years after it is closed, though). Also, sometimes closing cards can negatively impact your utilization rate. This is the current balance divided by your credit limit. When you close a card with no balance your credit limit is lower, but your balance is the same; therefore, your credit utilization ratio is higher. Generally speaking, you want your credit utilization to be below 30%. Sometimes closing a credit card may be more harmful to your credit than leaving it open and not charging anything on it.

It is always a good idea to monitor your credit score, especially if you are just beginning to build credit. The three main credit score rating agencies are Experian, TransUnion and Equifax. Many credit card companies offer free credit reporting once you have a credit card account with them. Aside from credit card companies, CreditKarma and CreditSesame are just two examples of reputable companies offering free credit reports. Below is a chart showing credit score ranges and how they are perceived by creditors.


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