Use These 3 Simple Strategies for Building Good Credit

Building good credit is an important financial goal for anyone, an especially when you’re young and starting out.

While it’s wise to avoid borrowing irresponsibly, the fact is that your credit history is one of the keys to your financial future. Forgoing all credit entirely will make it much more difficult to finance a house or car when you need one.

You want to get into the higher credit score ranges as early as possible if you are considering taking a mortgage or big car loan.

If you want to start building good credit, you can do so with caution. Highly controlled utilization of credit cards and other simple personal credit will help you slowly and successfully build a positive credit history.

Let’s go over:

• How building credit works
• The key strategies for building a good credit history
• The right products purely for building credit

How Do I Build My Credit?

In general, building credit is simple. You just borrow money and then pay it back on time. By continuing to do so over time, you will slowly increase your credit score.

While the basic concept is exceptionally simple, you can’t maximize your credit by just using one credit card for $50 per month. That will certainly help, but there are a few factors that go into your credit score:

• Your payment timeliness
• The number of credit accounts you have open
• Credit utilization ratio (the credit you have available : the credit you are using)
• The age of your credit accounts
• The diversity of your credit (ex. two credit cards < one credit card and one line of credit)
• Hard inquiries (applying for new credit has a slightly negative effect)

Equifax and Experian both offer similar explanations of how they determine your credit score. However, each credit reporting bureau will weigh each factor differently. Regardless, you need to work around each of these factors if you want to maximize your credit score over time.

Most strategies for growing your credit score while you’re young have to do with the highly controlled use of credit.

Read more about the importance of credit scores: 3 Critical Ways Credit Scores Can Be Obstacles When Purchasing Real Estate

What are 3 Strategies You Can Implement to Build Good Credit History?

There are some straightforward ways to increase your credit score.

1. A Simple Credit Checklist

First, make sure you’re building and applying the following financial practices and habits:

• Paying all your bills on time (this alone is 35% of the FICO model)
• Not going above 50% of your credit limit
• Start with a secured credit card if you can’t get an unsecured card
• Paying off existing debts before taking on new ones
• Becoming an authorized user on a trusted family member or friend’s account
• Get a credit limit increase to correct high credit utilization ratios
• Apply for positive enhanced credit reporting programs like Experian Boost

2. Using Credit Builder Programs

Credit builder programs include some mix of:

• Credit builder loans
• Financial/credit education
• Financial consultation

The key to how these programs increase your credit score is the first point: small, manageable, affordable short-term loans.

The credit builder lender will offer a short-term personal loan, often for as little as one month.

The amount will be quite small when compared with other personal loans. The point is to get a repayment schedule that is completely affordable and enables you to build positive credit history.

More comprehensive programs are available for people with a negative credit history. As a young person with little or no credit history, it’s more sensible to simply focus on a credit builder loan and make sure you pay it back on time.

3. Piggyback off Your Parents

There’s nothing wrong with using your parents’ good financial habits to improve your own credit score. Ask your parents if you can be an authorized user on their credit cards.

If your parents have good credit and maintain good habits, this is a very easy way for you to build credit. The thing is that this option doesn’t require any work on your parents’ parts and doesn’t cost them anything. (As long as you pay off your balances and use them responsibly!)

In fact, you don’t even need to use their credit cards at all to benefit from their responsible management.

Credit Cards for Building Good Credit

Some credit cards are specifically tailored to the needs of young people without established credit histories. There is a lot of overlap with credit cards for students. Some examples are:

• Deserve® EDU Mastercard for Students
• Discover it® Secured Credit Card
• Petal® 2 “Cash Back, No Fees” Visa® Credit Card

Conclusions: Fast Track to Building Good Credit

You can build a great credit history with a mix of generally good financial habits and deliberate strategies.

It can be difficult to establish your credit history, especially if you are struggling with student loan debt. However, there are normally at least a few other options available to you.

It’s well worth it to take advantage of some of the tips and strategies we’ve gone over. That way, you can get closer to qualifying for ideal mortgages and other important loans, one step at a time.

Editor’s note: This article was originally published Oct 20, 2023 and has been updated to improve reader experience.

Photo by Anete Lusina