Building credit in the United States is crucial for financial health, especially if you plan on making big purchases such as buying a home, a car, or applying for loans and credit cards. A good credit score opens doors to lower interest rates, better loan terms, and even favorable insurance premiums. However, building credit takes time, consistency, and an understanding of how the credit system works. Here are 10 essential tips for establishing and improving your credit in the U.S.
1. Understand How Credit Scores Work
Before diving into strategies to build credit, it’s important to understand what a credit score is and how it’s calculated. In the U.S., the most commonly used credit score is the FICO score, which ranges from 300 to 850. It’s based on the following factors:
- Payment history (35%): Consistently making on-time payments is the most critical factor in your credit score.
- Credit utilization (30%): This refers to the percentage of your total available credit that you’re using. Keeping it below 30% is recommended.
- Length of credit history (15%): The longer your accounts have been open, the better.
- New credit inquiries (10%): Applying for too much new credit in a short period can hurt your score.
- Credit mix (10%): Having a combination of credit types (credit cards, installment loans, etc.) can positively impact your score.
Understanding these elements will help you take specific actions to build your credit effectively.
2. Get a Secured Credit Card
If you’re just starting out or rebuilding your credit, a secured credit card is one of the best ways to establish credit. With a secured card, you make a deposit that serves as your credit limit. For example, if you deposit $500, your credit limit will be $500.
How it helps:
- The deposit reduces the lender’s risk, making it easier to get approved.
- Your payment history is reported to the credit bureaus, helping you build your credit score as long as you make payments on time.
Pro tip: Treat the secured card like a regular credit card—keep your balance low and pay the full amount each month.
3. Make On-Time Payments
Your payment history accounts for the largest portion of your credit score, so making payments on time is absolutely critical. Whether it’s a credit card, student loan, or car payment, missing payments can severely damage your credit.
How to stay on top of payments:
- Set up automatic payments for your accounts to ensure you’re never late.
- Use calendar reminders or budgeting apps to track due dates.
Even if you can only make the minimum payment, paying on time is better than paying late.
4. Keep Credit Utilization Low
Credit utilization refers to the amount of credit you’re using compared to your total available credit. It’s recommended to keep your utilization rate under 30%, but the lower, the better. For example, if you have a $1,000 credit limit, try to keep your balance below $300.
Why this matters:
- A high credit utilization rate signals to lenders that you may be overextended and can hurt your score.
- Keeping your utilization low shows that you’re using credit responsibly.
Pro tip: If you’re getting close to your credit limit, try making multiple payments within a month to keep your balance down.
5. Don’t Close Old Accounts
The length of your credit history affects 15% of your FICO score. Closing an old account can shorten the average age of your credit accounts, potentially lowering your score.
Why keep old accounts open?:
- Even if you’re not using a credit card, keeping it open shows a longer credit history and more available credit, which improves your credit utilization ratio.
If you must close an account, start with newer ones rather than older, well-established accounts.
6. Become an Authorized User on Someone Else’s Account
If someone with good credit (such as a parent or spouse) adds you as an authorized user on their credit card, their positive payment history can benefit your credit score.
How it works:
- As an authorized user, you’re able to use the account, but you’re not responsible for making payments.
- The cardholder’s payment history is reflected on your credit report, which can help build your score.
Make sure the primary account holder is reliable with payments, as their negative credit habits can affect you, too.
7. Diversify Your Credit Types
Having a mix of different types of credit (credit cards, auto loans, student loans, etc.) can positively impact your credit score. Creditors like to see that you can manage different types of credit responsibly.
Types of credit:
- Revolving credit: Credit cards, lines of credit.
- Installment credit: Auto loans, student loans, mortgages.
You don’t need to open multiple accounts just for the sake of variety, but having a healthy mix of credit types can improve your overall score.
8. Limit Hard Inquiries
Every time you apply for a new line of credit, a hard inquiry is made on your credit report. While one or two hard inquiries won’t significantly impact your score, multiple inquiries in a short period can lower your score.
Best practices:
- Only apply for credit when you truly need it.
- If you’re rate-shopping (e.g., for a car loan), try to do it within a short period (typically 14-45 days), as FICO treats this as a single inquiry.
Pro tip: Pre-qualify for loans or credit cards to check your odds of approval without impacting your score with a hard inquiry.
9. Use Credit-Building Loans
Some banks and credit unions offer credit-builder loans designed specifically for people with no or low credit. Instead of giving you the loan money upfront, the lender holds it in a savings account while you make payments. Once you’ve paid off the loan, the money is released to you, and the lender reports your positive payment history to the credit bureaus.
Why it’s effective:
- It’s a safe way to build credit while saving money at the same time.
- It helps diversify your credit types, contributing to a stronger credit score.
10. Monitor Your Credit Regularly
It’s essential to monitor your credit report regularly to ensure the information is accurate and to catch any potential errors. By law, you can obtain a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year through AnnualCreditReport.com.
What to look for:
- Verify that your personal information and account details are correct.
- Check for signs of identity theft or errors, such as accounts you didn’t open or late payments you didn’t make.
Pro tip: Consider using a free credit monitoring service that alerts you to any significant changes in your report.
Final Thoughts
Building and maintaining good credit is essential for your financial well-being in the United States. By following these 10 tips, you can improve your credit score over time and gain access to better financial opportunities. It takes time and discipline, but with consistent effort, you’ll reap the benefits of a strong credit history. Whether you’re just starting out or looking to rebuild your credit, these steps will set you on the path to success.