How do you build credit?

Gina Pogol
The Mortgage Reports contributor

In this article:

Having a good credit score saves you money on everything you finance, and can even help you get a job or pay less for insurance. But how do you build credit and achieve an excellent credit score?

  1. Start small and pay religiously on time
  2. Add an installment loan
  3. Keep balances low

It’s easier to build good credit from nothing than it is to rebuild bad credit.

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How do you build credit? Your first credit card

There are many products available to begin building a credit history. Retail store credit cards, credit cards for college students and credit builder cards have pretty low barriers to entry.

The trick with these accounts is to not carry a balance because their interest rates tend to be higher. Use them regularly for small purchases and pay them off right away.

Related: Catch-22 (you need credit to get credit)

It takes at least two accounts, or “trade lines” to generate a FICO score.

Secured credit cards

If you cannot get approved for a regular credit card, try a secured credit card. Secured credit cards require you to leave an amount on deposit with the card company, and that usually determines your credit limit.

Make sure you get a secured credit card that reports your payment history to the three big credit bureaus — Experian, TransUnion and Equifax. And choose carefully — these cards can have some really sneaky fees — activation charges, set-up fees, monthly maintenance charges, and more. Compare several and pick one with low out-of-pocket costs.

Establishing a good payment history with a secured card will help you get a regular credit card. Alternatively, some secured cards convert to regular cards after you create a good track record, and you get your deposit back.

Installment loans

Installment loans deliver a lump sum to you, which you repay over time. Usually, your interest rate and payment don’t change during the term of the loan.

Auto financing and personal (signature) loans are examples of installment loans. Other installment loans include auto financing and student debt.

Related: How student loans affect your credit

Unlike credit cards, you can’t choose NOT to carry a balance with an installment loan. So your interest rate and the loan’s affordability really matter.

Installment loan payment history is more heavily weighted than revolving credit card history. And adding an installment loan improves your mix of credit types (10 percent of your FICO score). Do this when you know you can manage your debt and are ready to step up your credit game.

Installment loan rates can range from zero percent for some car promotions to about 36 percent for fair credit loans from peer-to-peer sites.

Authorized user accounts

Another way to get credit is to become an authorized user on someone else’s account. For instance, parents may choose to allow a child in college access to one of their credit cards for emergencies. The account history attaches to their child’s credit report and helps build a better score.

There are a couple of cautions — first, make sure that the account holder has good credit and pays that account on time (within 30 days of the due date). If he or she pays late, that can really shoot down your credit score.

The second thing is to understand that being an authorized user on someone’s account is a huge responsibility. The account holder is doing you a giant favor, so don’t abuse it. Do not use the account. In fact, you don’t even need to know what the account number is to reap the benefit of an authorized user trade line.


Few landlords report your rental payment history to the big credit bureaus. Larger apartment communities are more likely to than landlords with a handful of homes to rent.

When you look for a rental, ask if they report to a service like Rent Karma or Rent Reporters.

If you’re renting and pay on-time, ask your landlord to report your payments. If the landlord refuses, keep copies of your own canceled rent checks or receipts to prove your on-time payment history.

Related: What credit score do you need for a mortgage (the complete guide to mortgage credit)?

Your rent history is important to your mortgage lender. Depending on the rent reporting service, your information will be reported to one or more of the big bureaus and may be incorporated into your credit score.

Each rent reporting service has a different relationship with various bureaus. For instance, Experian will include data from its own RentBureau division in its credit scores. However, rent data from other sources will only be listed on the report, not included in the scoring.


You can get a mortgage with no credit score. But it’s a lot easier if you have a credit history and score. If you don’t have a credit score, mortgage lenders will underwrite your loan manually, working through a lender’s guidelines and determining if you meet those guidelines.

In lieu of traditional trade lines, mortgage lenders consider your history with utility payments, regular deposits to savings, and rent payments to your landlord.

Related: No credit score (Do you need a bad credit mortgage?)

Expect to confront stricter guidelines — such as 5 percent down instead of 3 percent — when your loan can’t be underwritten electronically. Lenders don’t like risk, and they see a “thin file” as riskier because there is no track record that proves you can successfully manage the repayment of a large debt.

Other things that might be overlooked if an automated underwriting system (AUS) approves your loan could require more scrutiny in a manual underwriting situation. The software might determine that it doesn’t matter that your new mortgage payment would significantly exceed your current rent. But a human underwriter is likely to care.

If you do get a mortgage, it can really help you improve your FICO score. Mortgage accounts are the most-heavily weighted by credit scoring models. Adding on improves your mix of credit.

The main thing

When you have a long, good credit history and a big batch of trade lines, one small misstep is unlikely to crater your credit rating. But when you have one six-month-old credit card and maybe a rental history, a late payment or small collection can generate a (bad) credit score.

And bad credit is always worse than no credit.

Verify your new rate (Oct 20th, 2020)


Step by Step Guide

Building Good Credit