If you want to establish or build your less-than-perfect credit, applying for a credit card that reports your account activity to the three major credit bureaus (Equifax, Experian and TransUnion) is a great place to start. Once you’ve been approved, you should follow these five tips:
Paying on time is the most important factor in building good credit. Payment history makes up 35% of your FICO Score (the credit scoring model typically used by lenders) and 41% of your VantageScore.
We always recommend paying off your credit card in full each month, since this can help you avoid interest charges and prevent your balance from getting out of hand. But if you can’t pay off the full balance, make at least the minimum monthly payment due.
It’s a good rule of thumb to keep your credit utilization ratio — the amount of debt you’re carrying relative to how much you can borrow — below 30%. That’s because, if you get close to maxing out your card, that may signal to issuers that you’re at risk for not being able to pay back what you’re borrowing.
Credit card balance / Credit card limit = Credit utilization ratio
For example, if you’re carrying a $3,000 balance on a credit card that has a $5,000 credit limit, your credit utilization ratio will be 60%. To keep your credit utilization within the recommended amount, you should keep that balance below $1,500.
Length of credit history makes up 15% of your FICO Score. Part of this is the average age of your accounts, which goes down every time you open a new one. Plus, when you apply for new credit, a hard inquiry is generated. This can knock your credit score down by 5 to 10 points each time it occurs and remain on your credit report for two years (though the negative impact will lessen over time).
Applying for new credit too often can also indicate to lenders that you’re desperate, which makes you a risky borrower.
While you’ll want to avoid spending more on your new account than you can afford to pay off, you should make regular purchases on your credit card. That’s because issuers like to see that you’re using your credit card and not leaving it dormant.
Plus, an issuer may close your account due to inactivity — which will shorten the length of your credit history.
Another way to lower your credit utilization is to request a credit limit increase from the issuer. A higher credit limit gives you more flexibility to spend without dramatically increasing your utilization ratio.
That said, it may not be possible to boost your credit limit right away, so you should think of this step as a long-term goal. You’ll have a better chance of being approved for a higher credit limit if:
Even with limited or poor credit, there are good credit card options available to help build your credit. Depending on your financial needs, your best bet will likely be a secured card, student card or store card.
Secured credit cards
If you have a poor credit score or no credit history at all, a secured credit card is a solid choice. It’s “secured” because you’ll need to submit a security deposit to the issuer in the amount of your desired credit limit. This protects the issuer if you default, so secured cards are usually accessible even to those with limited or bad credit.
The Discover it® Secured Credit Card is our pick for the best secured credit card. This card requires a refundable security deposit ranging from $200 and $2,500, which will serve as your line of credit. Plus, it comes with a $0 annual fee and is accessible to those with limited / poor credit. After you’ve had the card for seven months, Discover will begin conducting monthly account reviews to see if you’re eligible to graduate to an unsecured card and get your deposit refunded.
Student credit cards
Student credit cards are another great option to help build credit if you’re a college student. These credit cards are specifically designed to help you build your credit profile, since they often accept applicants with limited or poor credit. Otherwise, they work just like regular credit cards, though they’ll likely require you to show proof that you’re currently enrolled in an accredited school.
The Bank of America® Travel Rewards Secured Credit Card is our pick for the best student credit card. Along with a welcome offer and rewards on every purchase, this $0-annual-fee card provides a long interest-free period on purchases.
Store credit cards
Store credit cards are among the easiest credit cards to get approved for, since they tend to have lower credit limits and higher APRs than traditional cards. But while these cards tend to have less stringent credit requirements for approval, they often come with rewards programs that seem designed to get you to spend more than you otherwise would at the store.
The Target Circle™ Card is our pick for the easiest store card to get approved for. This $0-annual-fee card doesn’t require a security deposit and is available to those with good credit. And if you shop at Target even occasionally, this card can save you money — cardholders get 5% off at Target in-store and online, applied when you check out.
If you can’t qualify for your own credit card (or just don’t want one), but you have a family member or close friend who manages their finances responsibly, you might consider asking to be added to one of their cards as an authorized user.
Becoming an authorized user can quickly boost your credit score. With many cards, balances and payment history get added to the credit reports of both the primary cardholder and the authorized user. This means that if your family member or friend is using the card, you’re essentially “borrowing” their history with that account — even if you never use the card yourself.
On the downside, the primary cardholder is ultimately responsible for any credit card charges you do make. To avoid conflict with family or friends, ensure that you’ve worked out the details of how to pay back any purchases you make. You can even agree that the primary cardholder will keep hold of the physical card the issuer sends you, to avoid any temptation to overspend on the account.
After a year or so of being an authorized user, if you feel ready to take the next step, you may be able to qualify for a credit card of your own. In that case, review our recommendations for the best credit cards for beginners.
It’s possible to build credit without a credit card. Here are a few methods:
Other types of loans. If you’re making payments on student loans, auto loans or personal loans, that will build credit history.
Experian Boost. This is a free service offered by the credit bureau Experian, meant to help those with low credit scores or limited credit history build credit. With Experian Boost, certain payments that wouldn’t normally count toward your credit history — Netflix, utilities and your phone bill, for example — can build credit and potentially improve your credit score. The caveat is that you’ll only be building credit history with Experian, not with the other two bureaus.
Credit builder loans. Similar to a secured credit card, a credit builder loan requires you to make a deposit into a savings account or certificate of deposit (CD). You’ll then make installments payments on the loan, which are reported to the credit bureaus.
If you’re concerned a credit card will lead to the temptation to overspend, consider putting a small, recurring charge on your card, setting up autopay and then locking the card away. That way, you won’t run the risk of accruing a large balance — but you’ll still get the benefit of monthly spending and payments being reported to the bureaus.No, you don’t need to carry a balance on your credit card to build credit history. As long as you’re using your card, and your issuer is reporting spending and payment activity to the credit bureaus, you’ll build credit.
We recommend always paying your card off in full rather than paying a balance — when you roll a balance over from month to month, you’ll incur interest charges unless you’re in a 0% introductory APR period.
Yes, as long as the issuer reports your account activity to the credit bureaus, using a store credit card responsibly can help build credit history.
Yes, you can find credit cards targeted to applicants with low credit scores. We recommend applying for a secured credit card. Secured credit cards are typically more accessible to people with bad credit, since the security deposit acts as collateral in the event you don’t pay back what you charged on the card.
One good way to keep an eye on your progress building credit is to check your credit score monthly. You can do this with a LendingTree Spring account.
In addition, federal law guarantees that each of the three major credit bureaus provide you one free copy of your credit report per year. You can also get free weekly access to your reports from annualcreditreport.com.
No, prepaid cards won’t build credit history. With a prepaid card, you’re loading funds onto the card, then spending what you’ve loaded. By contrast, with a credit card, you’re borrowing money from the issuer and then repaying it.
The information related to the Discover it® Secured Credit Card, Bank of America® Travel Rewards Secured Credit Card, Bank of America® Travel Rewards Credit Card for Students, Target Circle™ Card and American Express® Gold Card has been collected by LendingTree and has not been reviewed or provided by the issuer of this card prior to publication. Terms apply.
The content above is not provided by any issuer. Any opinions expressed are those of LendingTree alone and have not been reviewed, approved, or otherwise endorsed by any issuer. The offers and/or promotions mentioned above may have changed, expired, or are no longer available. Check the issuer's website for more details.
