The Best Way to Build Credit in Every Situation

The right strategy build credit and improve your score depends on your situation.

If you want a better credit score, then you need a strategic plan for how you want to build credit. The best strategy to use often depends on your financial situation, needs and goals. For example, credit cards are often the easiest and fastest tool you can use to build credit, but some people want to avoid credit card debt. So, if you want to avoid credit card debt, you can still build credit; you just need a different strategy.

The best way to use a credit card to build credit

Credit cards are the best tool for building credit for a few reasons:

  • They’re relatively easy to get, even if you have bad credit or no credit
  • You can use them to cover costs that are already in your budget
  • You can control how much you charge, so you don’t get overextended with debt.

This is how you build credit using a credit card:

  1. First you decide what you want to use the card for. If it’s a reward card, use it for the purpose that earns you the most rewards, such as gas purchases or groceries.
  2. Use the card to cover all those charges you designate throughout the month.
  3. At the end of the month, pay off the balance in-full.
  4. Do this month after month to build credit quickly.

Depending on where your credit score is when you start, this can help you achieve a significantly better score in as little as six months.

Using multiple credit cards to build credit faster

Once you get comfortable managing the debt from one credit card, you can get another. More credit cards mean a higher total credit limit, which is good for your score. In addition, it gives you a more diverse mix of credit lines, which is also good for your score.

So, you want to gradually add credit cards to help you build credit faster. New applications should be spaced out to avoid damaging your score by authorizing too many credit checks at once. But, the more debts you can manage at the same time, the higher your score will go.

Just make sure to keep those balances low! If you use more than 30% of an available credit limit, it’s bad for your score. And lower balances are always better. In fact, paying all your debts in-full every month will get you to excellent credit in no time.

The best way to build credit without a credit card

If you’re trying to stay away from credit cards, it’s still possible to achieve a good credit score. You just need to use loans instead. This can include:

  1. Auto loans
  2. Personal loans
  3. Student loans
  4. Credit builder loans

The more types of loans you have, the easier it will be to build credit. Of course, this means you must keep up with all your loan payments, because any missed payments will set you back. But loans are often easier to manage that credit cards, because they have installment payments. In other words, the amount you need to pay this month is what you paid last month. So, it’s easier to budget around loans than it is credit cards.

Credit builder loans are small specialized personal loans that you take out for a specific purpose. For example, there are companies that offer loans and then invest the money for you in a Certificate of Deposit (CD). The CD grows with earned interest, so your investment grows over time. At the same time, you pay the loan back to build credit. So, these loans allow you to build credit and build savings at the same time.

You can do the same thing for yourself. Just take out a small personal loan and then invest the funds you receive.

The best way to build credit at age 18

The Credit CARD Act of 2009 restricted access to credit cards, so now if you’re under age 21 you can’t open a credit card without a cosigner. So, if you’re 18 and you want to start building credit, you’ll need to talk to your parents or guardian. They need to cosign a credit card so you can start building credit.

Just be careful to keep up with the payments! If you don’t, it will drag down your score AND whoever cosigned for you. And make sure the account is cosigned. In many cases, authorized users don’t build credit history. You’re not legally responsible for the debt, so you can’t build credit when it gets repaid. There are some credit card issuers that report credit history for authorized users, but it’s rare. So, make sure to ask.

The best way to build credit if you have no credit history

If you just turned 21 and your parents didn’t give you a credit card earlier OR you’re new the U.S. and have started a credit profile, then you have no credit score. Having no credit history can be almost as bad as having a bad credit history. Lenders don’t know how responsible you are with debt yet, so they may be leery of giving you an open credit card line.

But that doesn’t mean that you’re stuck. Apply for a secured credit card, which you can get by putting down a small cash deposit. You can get secured credit cards with bad credit or no credit, because the creditor has the security of your cash deposit as collateral. Start building credit with the secured card, then you can qualify for unsecured cards in about six months to a year.

The best way to rebuild credit after financial hardship

Secured credit cards are also the best way to rebuild your credit if you have some negative remarks like bankruptcy or foreclosure dragging down your score. Use a small cash deposit to open a secured credit card. Make small charges throughout the month that you can afford to repay in-full at the end of each billing cycle.

Then, once you have a little traction, consider getting an unsecured credit card or a loan. Auto loans look good to creditors, as do personal loans. Credit builder loans give you a way to make an investment to build your net worth and build credit at the same time. Just remember to add new credit gradually so you have time to make sure your budget is stable before you add the next debt.