It took me years to learn everything that you read here.
I used to work at a credit company. I also went through an expensive credit-building program and scoured the credit forums high and low. By applying what I learned, my credit scores went from the 500s to the 800s.
This guide will teach you how to get a top-tier credit score and qualify for the best home loans, auto loans, and credit cards.
How to Build Credit:
Chapter 1: Understand How It Works
Your credit scores measure how risky you are to lend money to.
A good credit score tells a lender that you’re a good borrower. A good credit history tells lenders that you’re responsible with money.
Most credit scores range from 300-850. A good credit score is 670 or higher. A credit score of 740 or more is considered very good, and will get you the best interest rates and terms.
Here are the different credit score tiers:
When you’re just starting out, you don’t have a credit score. You don’t start out with a credit score of 300 and work your way up.
Let me be crystal clear: when you start building credit, your goal is to have a credit score of at least 740.
The Fair Isaac Corporation is the company that creates the credit scores that pretty much all lenders use – the FICO® Score. They have a monopoly on the credit score industry.
The credit bureaus compile credit data. The three major credit bureaus are Experian, TransUnion, and Equifax. Lenders send them data, and then they create the credit reports.
Your credit report is a summary of your past and current debts, payment activity, and legal filings related to your credit. (In other words, collections accounts and bankruptcy filings appear on credit reports along with loans and credit cards.)
This is how the credit system works:
- Lenders report your loan and payment history to the credit bureaus
- The credit bureaus house that data and create your credit reports
- Your FICO Scores get created based on information in your credit reports
Because you have a separate credit report from each credit bureau, you get a separate FICO Score for each credit bureau.
You want a good credit score from each credit bureau, because you don’t get to pick which score a lender uses to qualify you for financing.
Chapter 2: Monitor Your Credit
The first step in your journey is accessing your credit reports and scores. I’m going to show you how to do that for free.
Credit Karma allows you to check your credit reports from them directly from their website or their mobile app. (On both Apple and Andriod.)
After you create an account with them, it looks like this:
They send you notifications and emails when your credit scores change or there are significant changes to your credit report.
One quick note: the credit scores that they give you aren’t from FICO. They are from VantageScore, which also uses the same credit score tiers of 300-850.
Your VantageScore is usually close to your FICO Score, but they are often different by up to 30 points.
The credit bureau Experian will give you your free FICO Score from your Experian credit report.
If you want to get your FICO scores from all three credit bureaus, you can buy them directly from MyFICO.com or upgrade to a paid Experian subscription.
It’s important that you stop and get your accurate, up-to-date credit reports and scores before moving forward with building your credit.
If you put your information into Credit Karma and they can’t find credit reports for you, that’s
probably because you don’t yet have credit.
You’ll notice that there are various things listed on your credit report. If any of those things are incorrect, you have the legal right to dispute this information!
The first thing to pay attention to is your personal information.
Chapter 3: Create Your Credit Identity
It starts like this:
Your personal information is listed first, including your name, address, and social security number. This is not trivial – make sure that these are correct.
Make sure that the correct spelling of your name is on your credit report. If it’s not right, you can dispute it.
You want your name and address to appear exactly the same on all three credit reports and on every credit application.
For example, here are different ways that my name could appear on a credit report:
- Garit Boothe (no middle name)
- Garit L Boothe (middle initial)
- Garit Lee Boothe (complete middle name)
Again – this isn’t trivial. People who go through a divorce and do a name change often have issues qualifying for new credit accounts because their name is different in a bunch of different places.
Also, if your identity gets stolen, it could really mess up your credit. This is surprisingly common!
It happened to my friend, whose name is “Gary Sorenson”. Incorrect information from another Gary Sorenson ended up on his credit report, and he had to hire a credit attorney to sort it all out.
You have to monitor your credit to be aware of these issues!
Your address is important too. My address could appear in a different way:
- 1234 Suburb Street, Apt. 12 Salt Lake City, Utah 84384
- 1234 S Suburb St, Apartment 12 Salt Lake City, Utah 84384
- 1234 Suburb St., #12 Salt Lake City, UT 84384
Make sure that your name and address are exactly the same on every financial form that you complete. If they are wrong on your credit reports, you can file a dispute with the credit bureaus to correct this. (You can do this for free yourself, no attorney is needed.)
Here’s why: the world is dominated by computers. When you complete an online credit card application, it goes through a computer to qualify you. You can be auto-approved with only a 30-second wait and no human ever looks at it!
This is what you want: auto-approval.
If the name or address on your credit card application is different than what is on your credit reports, it automatically denies you or flags you for human review.
Trust me: you don’t want your auto loan application turned down by “the system” at the car dealership just because your old apartment address is on your credit report!
If you’re building your credit for the first time, then make sure that you use the exact same variation of your name and address on every application that you do.
This is pretty easy to do if you stay consistent from the beginning.
Chapter 4: Get Tradelines
A “tradeline” is any credit account that reports to the credit bureaus. This includes credit cards, auto loans, home loans, student loans, lines of credit, furniture loans, jewelry loans, or any type of financing.
The type of tradelines that you get are super important. Generally speaking, there are three types:
- Installment loans
- Revolving credit
Installment loans are traditional loans. Examples include a car loan, student loan, personal loan, and home loan. You can find them at any bank or credit union.
Revolving credit accounts include credit cards and lines of credit.
The “other” category includes rental tradelines and utility tradelines.
Historically, timely payments on your rent and utility bills didn’t help you build credit. But now you can get your rent payments and other bills reported to the credit bureaus to start building credit!
Let’s talk strategy.
Remember our goals at the beginning of the article?
- Get a top-tier credit score (740+ FICO score)
- Qualify for any loan that you want
The proven strategy for this is to get three revolving credit accounts and one installment loan.
The problem is that lenders don’t want to give you money if you don’t already have good credit.
But how can you develop your credit if no one will lend to you? It’s a bit of a Catch-22.
The answer is that you use credit builder accounts.
For example, the company CreditStrong has a credit builder account that anyone can use. (These are also called “credit builder loans”.)
For only $15 per month, you can start making payments that improve your credit score and credit history. The credit bureaus see this as a secured loan – a type of installment loan.
There are many products that can help you build your credit from scratch.
Installment loan examples include:
- CreditStrong’s credit builder loan
- Self Financial’s credit builder loan
Starter revolving credit products include:
- Grow Credit offers a virtual credit card that helps you build credit with the bills that you’re already paying
- The Chime Credit Builder card
- Secured credit cards
- CreditStrong’s Revolv product
Check out our Digital Honey approved credit builder partners.
A Note About Credit Cards
20 years ago (or even 10), a secured credit card was your best bet to start building credit from scratch.
A secured credit card requires that you put down a deposit equal to your credit limit. For example, if you want a $300 credit limit, then you need to give the bank $300 just to open the credit card account.
The credit card issuer does not ever give you that deposit back. It’s gone forever.
Remember, if you want to build credit, you need three revolving credit accounts. So if you put down a $300 deposit on each secured card, you’re out $900.
(You still have a high-interest rate and fees to pay on any money that you borrow through the secured card.)
In effect, a secured credit card deposit is a bribe. You are bribing the banks to help you build credit. Which is why a secured card is a great deal for the credit card company! But it’s a bad deal for you.
In the 2020s, the best credit cards for building credit don’t require a deposit.
If you’re worried about credit card debt, there are ways to build credit without a credit card.
(Remember how I said you could use your rent and bills to build credit? Check out our review of BoomPay for rent and Grow Credit for your other bills.)
Once you have credit accounts, how can you manage them effectively to get maximum credit scores?
Chapter 5: Manage Them Smartly
Your tradelines aren’t going to pay themselves! It goes without saying that you need to pay your debts on time if you are going to build credit. But there’s a lot more to it than that.
The FICO credit scoring model says that there are five credit scoring factors that they take into account when creating your credit score.
The FICO Score Factors. Credit: myFICO.com
The five factors include:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
So it stands to reason that you need to do the following to build your credit:
- Payment history: Make EVERY payment on time.
- Amounts owed: Keep your credit utilization at 10% or less.
- Length of credit history: The longer your accounts have been open, the better.
- New credit: Don’t recklessly apply for many different loans and credit cards.
- Credit mix: As I said earlier, get both revolving credit and installment credit.
Your credit history must be perfect. Even ONE 30-day late payment will lower your credit considerably. (Fortunately, payments that are late less than 30 days don’t show up on your credit report as late.)
Keeping your credit utilization low and making on-time payments every month is the hardest part of building credit.
The higher your credit card balance, the worse your credit scores get.
Let’s use a previous example. Say you have a credit card limit of $1,000. If you spend $600 on your credit card, then your credit utilization ratio is 60%. (600/1,000 = 60%.)
If you spend $300, your credit utilization is 30%. If your balance is $90, then your credit utilization is 9%.
Pop quiz: which of these scenarios do you think will result in the best credit score?
If you answered 9%, you’re correct.
The higher your credit utilization, the lower your score goes. If your credit utilization is 50% or more, you will really hurt your scores. The credit scoring system likes to see that you have lots of available credit.
I’ve played around a lot with this as I manage my own credit scores, and I’ve noticed that having a 0 balance on all my credit cards results in a lower credit score.
Since you need to a) make monthly payments on each of your credit cards and b) keep a low balance, here’s my advice. Only use each card for a $20 or $30 purchase each month, then pay it off. Rinse and repeat every month.
I know it’s a lot to take in, but it’s actually quite simple to manage once you get used to it.
To recap, here’s how to build credit:
- Get 3 revolving credit accounts and 1 installment loan
- Carry a tiny balance on each revolving account
- Make your payments on-time, every time
- Do this for 12 months
That’s it. That’s all you have to do.
If you follow this advice, you WILL have a 740+ credit score within 12 months. Do this for two years, and your score will probably be in the 800s.
Frequently Asked Questions
How Do I Build My Credit to Buy a House?
As stated earlier, get your credit score to 740 or higher. A score of 680 or higher will always get you approved, but 740 or higher gets you the best interest rate.
Mortgage lenders also want to see that you don’t have any “bad” stuff on your credit report, like late payments or evictions for not paying rent.
If you follow my advice of three revolving credit accounts and one installment loan, then your credit will be in great shape to start applying for mortgages.
How Long Does It Take to Build Credit?
How Do I Fix My Credit?
If you have bad credit, building your credit up is only half the battle. The other half is addressing all of the bad stuff on your credit report. (This is known as “credit repair”.)
For more on this, read our DIY Credit Repair article.
How Do I Build Business Credit?
I am a Certified Lending and Credit Specialist and first gained experience fixing my own credit. My own credit scores went from the 500s to the 800s in one year. I studied economics at The George Washington University and now have my own business working with financial technology companies. I manage my own investments and live in Salt Lake County, Utah with my wife and two kids.