3 Ways to Build CreditCredit
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A good credit score can have a significant impact on your financial outlook, making it easier to access credit cards, loans, and other forms of credit. Increasing your score reduces your perceived risk and helps you qualify for more competitive interest rates when applying for new lines of credit.
While there’s no surefire way to boost your score overnight, you can start making progress by using a few reliable strategies for building credit. Regardless of your current credit score, this article will cover some of the simplest and most effective ways to improve your credit history over time.
Reduce Credit Utilization
Many Americans think of credit card balances and other forms of consumer debt as routine parts of their financial lives, but the reality is that they can have a long-term impact on your credit. In addition to the risk of building up too much credit card debt, you’ll also notice a reduction in your credit score if you use too much of your available credit.
Every credit card comes with a defined limit, and credit card providers report how much of that limit you use to the three major credit bureaus. If you have access to up to $5,000 in credit, for example, a balance of $2,000 would represent 40% credit utilization.
Tip: Keep Utilization Under 30%
In general, you’ll start to see your score decrease once you reach 30% or more in credit utilization. Keep in mind that dropping a card to 0% for a long period of time could result in the account being closed.
You can set up automatic billing on a small charge such as a streaming subscription to keep an account open.
The easiest way to use less of your credit limit is simply to pay off debts, but things aren’t always that simple. If you aren’t in a position to reduce your balances, the other option is to raise your credit limit.
Credit card providers are usually willing to increase credit limits as long as you’ve been a reliable customer.
In the earlier example, doubling the credit limit from $5,000 to $10,000 would bring utilization down from 40% to 20%, even though you would still be using the same amount of credit. If you can’t increase your credit limit on a card, you could also apply for a new credit card in order to raise your total limit.
Overall utilization is more important than utilization for any individual card.
Increase Average Age of Accounts
In addition to credit utilization, credit bureaus look at the average age of your accounts to get a better idea of your creditworthiness. People with a long history of reliable payments are considered more dependable creditors than those that have only been using credit cards for a year or two.
Of course, the only way to make your accounts older is simply to give them time, and there’s no shortcut to increasing the average age of your accounts. That said, closing an old account will always have a negative effect on this metric.
Tip: Avoid Closing Accounts Whenever Possible
With that in mind, it’s typically best to avoid closing accounts that are older than your average. On the other hand, closing newer accounts will increase your average age of accounts in the short-term, but it will also prevent those accounts from getting older later on.
Keeping inactive credit cards open has an additional impact on your credit score by increasing your total credit limit. You should keep old accounts open unless there’s a good reason to close them, particularly when trying to increase your credit score.
Become an Authorized User
Credit cards are most often tied to a single cardholder, but you can also add authorized users to an existing card. Authorized users can use the account to make purchases, and activity on the card is included in the calculation of their credit score.
While authorized users are technically authorized to use the card, it doesn’t have to work that way in practice. Many people authorize their children, spouses, friends, and others to help them build credit without giving them access to a card.
This helps them increase their credit score without mixing finances.
Tip: Ask Someone You Trust
If you know a friend or family member with excellent credit, don’t be afraid to ask if they’d be willing to add you to one of their cards as an authorized user. Let them know that you don’t expect to be able to use the card, and offer to return the favor if possible.
Once they understand how it works, they may be willing to put you on the card.
Don’t forget that all activity on the card will be reflected in your own credit report. If the primary cardholder fails to make payments, you’ll both suffer the consequences.
It’s critical for both sides to be open and honest with each other in order to avoid any problems.
Tip: Buy Tradelines
On the other hand, if you don’t know anyone who could add you to their card, you can also look for tradelines online. A growing number of platforms connect people who have poor credit to others with low credit utilization and a reliable payment history.
For a small fee, you’ll have access to the same benefits that you could get from a friend or relative.
The key downside to this approach is that you won’t know the person whose card you’re using. Given the risks involved in attaching your name to someone else’s credit card, it’s critical to find a reputable service.
You should only buy tradelines if you’re extremely confident in the person you’re working with.
Building up your credit takes time, but you can make progress surprisingly quickly if you’re willing to adjust your approach.
These three tips are easy to implement and can help you substantially increase your credit score in a relatively short period of time.
Alex McOmie is a freelance writer for Money Done Right. He joined the Money Done Right editorial team in summer 2019. Learn more about Alex.