How To Build Credit: 7 Ways To Do It Smart
We work hard to bring you awesome editorial content. This page contains links from our affiliate partners which earn us a commission and help make this possible.
We all hear about credit scores and how important they are. You need a healthy credit score to do things like renting an apartment, borrowing money for a home or car, and sometimes even to be considered for a job.
If you don’t have much credit history or have a poor credit score, we’ll show you how to build credit with 7 ways to do it smart.
Why You Need A Healthy Credit Score
When you borrow money, the interest rate you pay is the cost of borrowing that money. The better your credit score, the lower the rate of interest a lender will offer you. A fraction here and a fraction there may not seem like it would make much of a difference, but it does.
If you borrow $100,000 at 4.0% for 30 years, the total you would pay back would be $171,870. If your interest rate on the same amount over the same period were 3.5%, the total you would pay back would be $161,656.
Just a difference of half a percentage point lower means you would save more than $10,000 over the life of a 30-year mortgage!
Excellent to Very Poor
There are several ranges of credit scores, but most are very similar. The scores below are FICO Scores, created by the Fair Isaac Corporation and used by many lenders when scoring credit.
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-699
- Very Poor: 300-579
Do you need a credit score of 850 to get the best interest rates? You don’t. If your score falls in the Exceptional range, you’ll be offered the best interest rates when borrowing money. If your score falls under Very Good, you’ll be offered better than average rates.
If your score is rated as Very Poor, it doesn’t necessarily mean you have bad credit. It can also mean you have what lenders call a “thin” credit file; you have little to no credit history. In either case, there are lots of ways to build credit fast.
1. Know and Monitor Your Score
This is step one when it comes to how to build credit, you have to know what your credit score is and because it can change frequently, you have to monitor your score too. Credit Sesame does both, and it’s free to use! Just create an account, and you can get your credit score today.
Not only does Credit Sesame give you an updated score monthly but it breaks down the components of your score so you can see if there are areas you could work on that would improve your score.
Credit Sesame also provides consumers with up to the minute alerts when there is a change to your TransUnion credit report. This is a vital service. A change to your credit report could be legitimate, you applied for an received a new credit card, and the information will register or your report. But someone else could have hijacked your identity and opened a card in your name.
They could go on a weeks-long shopping spree in your name before you realize it. This obviously impacts your credit score but the longer it goes on without your knowledge, the bigger the mess you’re stuck cleaning up.
The monitoring can also show you mistakes on your report which aren’t fraudulent. Mistakes can occur due to things like a misspelled name or a Social Security number that is similar to yours but off by a single number. These mistakes can be corrected, but you have to know about them to take the necessary action.
If you’re working on building or improving your credit score, being able to see that number improve on Credit Sesame can be an excellent motivational tool, like seeing the numbers on the scale move when you’re trying to lose weight.
2. Build Credit While Earning Rewards
One of the advantages of a healthy credit score is the ability to earn rewards when using a credit card. So it’s frustrating when you don’t have a credit score good enough to qualify for a rewards credit card. A good cash back rewards credit card can really save you some money but are usually reserved for those with at least a Good score. But the ABOC Platinum Rewards Credit Card makes a rewards card available to those who have just a Fair credit score.
The card doesn’t have an annual fee and has a great sign up bonus, another thing those with less than ideal credit usually miss out on. You’ll earn a $150 statement credit after a $1,200 spend in the first 90 days after opening the account.
Users earn 5 points per $1 spent on up to $1,500 in total spending in categories that rotate quarterly. Categories include groceries, restaurants, home improvement, airfare, hotels, and automotive parts, services, and repairs. All other spending is worth 1 point per $1.
You can redeem points for online gift cards, statement credits, merchandise, and travel. Points don’t expire. There is a 0% APR period of 12 months for purchases. After the introductory period, the APR reverts to the current variable rate.
3. Build Credit While Saving
When you think of how to build credit, you might think of taking out a small loan and paying it back on time. And you’re right, a small loan is a great way to build credit but it comes with the same problem that getting a credit card comes with. If you don’t have much credit history, it’s hard to get a personal loan.
Self Lender offers those with little credit a Credit Builder Account. This is an installment that borrowers pay off over 12-24 months. Each on-time payment (40% of your credit score) is reported to all three of the major credit reporting bureaus. Not only are you building your score, but you’re also creating an emergency fund.
Because on-time payments are such an important factor in building your credit score, a loan from Self Lender can really improve your score.
4. Pay Off Your Credit Card Debt Using a Lower Interest Personal Loan
Sometimes it’s not that you have a lack of credit but that you don’t have a great credit score. If you’re trying to rebuild rather than built credit, part of the problem may be credit card debt.
Amounts owed makes up 30% of your credit score and ideally, you want utilization of 30% or below. To make it simple, if you had a credit limit across all of your credit cards of $1,000, you don’t want to owe more than a total of $300. That would give you a 30% utilization.
If you’re in credit card debt, not only is it hurting your credit score, but it’s costing you money too in the form of interest. The average interest rate on a credit card is 17.64%. But there is a great way to solve both these problems.
A personal loan lends you money to pay off your high-interest credit card debt. Instead of having high-interest debt on one or more credit cards, you can use a personal loan to reduce those debts into one lower-interest monthly payment.
You don’t have to close your credit cards either which is actually not recommended because doing so lowers your credit score.
You can get a personal loan up to $100,000 and it generally takes just a few minutes to check your rate (usually without affecting your credit score). Each lender will have certain requirements potential borrowers need to meet. These three sites can get you on your way to paying less interest on your credit card debt:
- Credible offers personal loans borrowers can use to pay off credit card debt. In just 2 minutes you’ll get offers from up to 11 lenders, meaning you have a lot of choices when it comes to getting the best rate and term for your loan. Credible partners offer loans for up to $100,000.
- Personalloans.com is a lending marketplace. Potential borrowers can answer a few questions and see offers from lenders that best fit their personal loan needs. You can borrow as much as $35,000 and loan terms range from 90 days all the way up to 72 months.
- Upstart looks at factors beyond a borrower’s credit score when deciding whether or not to make a loan. It considers things like work history and education as well as credit score. You can borrow up to $50,000 with Upstart.
5. Refinance Your Student Loans
Is it student loan debt affecting your credit score? Because the cost of higher education is so expensive, we have to take out tens of thousands of dollars (or more) to pay for it and because we borrowed so much, it can take years to get those student loans paid off.
When you refinance your student loans, you lower your interest rate which enables you to pay them off more quickly which can help boost your credit score.
Refinancing student loans with Credible is fast and easy. Credible lets you browse for the best student loans refinance rates and terms for both federal and personal loans. Provide some basic information and Credible will show you as many as eight customized offers based on your financial history.
6. Get Debt Relief
Sometimes our debt is overwhelming and our credit score is not high enough to take advantage of things like balance transfer credit cards or personal loans to deal with it. If you’re in this situation, not only are you struggling with debt but your credit score is getting worse by the day. But there is help available.
CuraDebt offers a few kinds of help to those with overwhelming debt including debt relief, debt settlement, and debt negotiation. You can enter in some basic information about your financial situation and get an estimate of how much money CuraDebt can save you.
If you’ve got a decent enough credit score, a 0% balance transfer credit card could be a good option. This allows you to transfer the debt from your existing credit card to a new credit card with 0% interest for as much as 21 months, helping you pay off your credit card debt faster. See a list of top 0% balance transfer credit cards.
7. Rebuild and Repair Your Credit
Rebuilding your credit can be a time-consuming process. As we mentioned earlier, there can be mistakes on your credit report that are negatively impacting your credit score. You can rectify this information yourself but it takes a lot of time and follow up to make sure it gets done.
If you just don’t have the time or energy to take the DIY approach, there is help available. Lexington Law can give you the help you need when you’re struggling with how to build your credit. Lexington Law has been helping clients get inaccurate, out of date, and unverifiable information like late payments, liens, bankruptcies, foreclosure, and repossessions removed from their credit reports for nearly three decades.
Lexington Law offers a free consultation. Based on the information you provide during the consultation, they will formulate a plan to help get your score where you want it to be.
Your Credit Score is Important
It’s true, your credit score is important. A healthy credit score can save you thousands of dollars over the course of your life. And credit scores are necessary. Most of us are not able to buy a house or a car with cash and if you want to do things like rent a hotel room or a car, a credit card is often required to do so.
But it’s not hard to build credit and to maintain a healthy score. If you’re wondering how to build credit, these 7 smart ways to do it are all you need.