How to build credit: 8 tips

If you’re trying to build credit, things may seem a little backward when you realize you actually need credit to build credit.

But understanding credit basics like how to develop good financial habits can help you get started. Learn about ways you can build credit by using it responsibly.

What you’ll learn:

• Building credit takes time and effort. 

• To build credit, it’s important to practice good financial habits and monitor your credit routinely.

• One way to build credit is to use a credit card responsibly by doing things like making on-time payments every month and staying below your credit limit. 

• There are credit cards designed for people trying to build or rebuild their credit. They include secured cards, student cards, and cards for fair credit like the Capital One Platinum Mastercard® or QuicksilverOne card.

A credit card can be a valuable tool for building credit. But there are other ways to build credit.

Check out these tips for building credit and practicing responsible credit habits.

Credit might seem complicated. But learning how it works can help you plan ways to improve your credit scores. 

“A credit score is a number based on information contained in your credit report,” the Consumer Financial Protection Bureau (CFPB) says. “You don’t have just one credit score. There are many credit-scoring formulas, and the score will also depend on the data used to calculate it.”

That data can change based on when a credit score is calculated. But even though there are multiple credit-scoring formulas, the CFPB says they each use similar information to calculate credit scores.

Payment history is a major factor in credit-scoring calculations. FICO, one of the major credit-scoring companies, says payment history makes up 35% of its calculations and could involve payments on credit cards, installment loans, mortgages and more.

Why is payment history such an important indicator? Because “research shows that your track record of payment tends to be the strongest predictor of the likelihood that you’ll pay all debts as agreed to ... a lender’s number one priority,” FICO says.

The CFPB says automatic payments or electronic reminders are two helpful ways to ensure you pay on time. And if you’ve missed payments, the agency says “get current and stay current.”

According to the CFPB, “Part of your credit score depends on the amount of credit you have versus the amount you’ve used—known as the credit utilization ratio.” You can determine your credit utilization ratio by dividing the amount of credit you’re using by your credit limits on all your revolving accounts. 

FICO lumps credit utilization into a category it refers to as “amounts owed,” which accounts for 30% of its credit score calculations. 

“Keeping a low credit utilization ratio,” the CFPB says, “shows lenders you’re responsible and have available credit.” How low? Below 30%, according to the CFPB.

Length of credit history is the third most important FICO credit-scoring factor, accounting for 15% of its scores. It may seem odd that you have to first access credit to build credit. But there are credit cards designed for people with thin credit files to do just that:

• Secured credit cards: These cards look and function like most other credit cards. The main difference is secured cards, like those from Capital One, require a refundable deposit to open the account.

• Student credit cards: Capital One’s student credit cards offer cash back rewards and other perks. You may apply for these credit cards if you’re enrolled or admitted at an accredited university, community college or other higher education institution.

• Credit cards for fair credit: If you have fair credit, the Capital One QuicksilverOne card or the Platinum Mastercard could be options.

If it’s not the right time to get your own credit card, you could see if it’s possible to be added as an authorized user on the account of a trusted family member or friend. As an authorized user, you could get your own card and use it to make purchases. And if the account is used responsibly, that could help you build a positive credit history.

Credit mix accounts for around 10% of what makes up credit scores, according to FICO. And it’s an indicator of your ability to handle different types of loans, including revolving credit and installment loans.

But that doesn’t mean you should apply for a variety of different loans, according to FICO. “It most likely won’t determine whether or not you obtain credit from lenders,” the credit-scoring company says. 

Part of the reason has to do with the applications themselves.

Applying for a new credit card or loan typically triggers a hard inquiry into your credit. The record of those inquiries can stay on your credit reports for up to two years. That’s according to TransUnion, one of the three major credit bureaus.

And according to FICO, “Opening several credit accounts in a short amount of time represents a greater risk—especially for people who don’t have a long credit history.”

One way to avoid unnecessary hard inquiries is to see if you’re pre-approved. If the pre-approval process is similar to Capital One’s, checking won’t affect your credit scores.

Payments for things like your cellphone, utilities and rent often aren’t reported to the credit bureaus. So they may not have any impact on your credit, even if you’ve never missed a payment. But that type of information, known as alternative data, can provide the credit bureaus with additional insight for assessing your creditworthiness.

But how do you give them the information? It involves a process called self-reporting. The name is a little misleading, because you can’t just call up the bureaus yourself every time you make a payment. But there are services that can help.

By itself, keeping up with your credit won’t help you build credit. But it could give you an idea of where you’re starting and let you track your progress.

With a tool like CreditWise from Capital One, you can access your credit score and credit report anytime. It’s free and easy for everyone. And using it won’t hurt your scores, so you can check it as often as you want.

You can also use the CreditWise Simulator. It can help you explore the potential impact of your financial decisions before you make them. For example, it could simulate how adding new loans or credit cards could affect your credit scores.

Still curious about building credit? Here are answers to some frequently asked questions:

Building credit takes time, consistency and financial responsibility. By steadily making progress, you could set yourself up to reach your financial goals.

You can begin by finding out if you’re pre-approved for a Capital One credit card. It’s quick and it won’t harm your credit scores.