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How to Build Credit Over Time

April 06, 2021 · 4 minute read

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How to Build Credit Over Time

Making every payment on time is the ideal way to build credit successfully. The basic strategy for good credit is actually quite straightforward and intuitive: Be the kind of borrower you would want to lend to.

Acquiring Credit

Turning to a spouse or parent for a joint account or co-signer can be a valuable way to build credit (think joint credit cards or parents co-signing on student loans) for someone who does not have a credit history of their own. In the long run, however, a person will be in a much stronger position if they borrow in their name alone.

Credit cards don’t require a co-signer in most cases, so they can be a great place for someone to start building a credit history on their own. Eventually, this has the potential to make it easier to borrow in the future for such things as an auto loan, a personal loan or even a mortgage.

Paying Bills Consistently and on Time

Payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score. So the most important rule of credit is this: Don’t miss payments. Timely payments are crucial, and making at least the minimum payment on a revolving credit line can make a positive impact on a person’s credit score.

However, missing the occasional due date is not the end of the world. Especially over time, a borrower’s credit history will be long and deep enough to withstand an occasional late payment. Many lenders will actually allow customization of due dates to line them up with pay dates. Most allow automatic payments from a checking or savings account. Take the time to find the mix that works and keeps accounts up-to-date.

Monitoring the Ratio

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score. Paying revolving credit lines in full each month can have a positive impact on a person’s credit score because doing so essentially lowers the credit utilization rate.

Keeping Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. When debt accounts are closed, though, that history ends, and eventually closed accounts drop off the credit report entirely. A credit history looks better when it has a solid number of accounts in good standing that have been open for a long time.

One way to achieve this is to keep old credit cards open, even those not being used much anymore. Keeping these cards open, perhaps using them to automate a few bills like car insurance or a monthly subscription account, will signal that they are still very much in use. Paying them off on time and in full is still important to the health of a person’s credit. It might be wise to consider closing a card not being used regularly if the annual fees are so high that it isn’t worth it to keep the card open.

Boosting the Credit Mix

A diverse mix of credit products can also have a positive impact on a person’s credit. Opening at least one credit card is a good step for most borrowers. There are a wide variety of cards aimed at people with different interests, spending habits, and credit history. Although a mix of credit helps a person’s standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to have a mix of credit types.

Using a personal loan to finance a large purchase (home renovation, hospital bill, or similar expense) with a relatively low interest rate, and paying off that personal loan on time typically will have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering the interest rate being paid.

Checking the Credit Report

It’s recommended that a credit report be checked yearly from the three major credit bureaus. Reviewing them on a yearly basis is a good way to understand and monitor overall credit health. As a response to the Covid-19 pandemic, free weekly access to credit reports has been extended until April 20, 2022.

Consumers can request a free credit report any time adverse action has been taken against them. This might include being turned down for a loan or line of credit, or being denied an application for insurance or employment. Checking a credit report to make sure that all the credit listed there is accurate may uncover errors or fraudulent accounts that can be reported, keeping the credit score in good shape.

Limiting Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score, but it’s still a factor to keep in mind.

The Takeaway

Once good credit has been established, using it wisely and responsibly can offer flexibility and freedom. Installment loans like mortgages, car loans, and student loans might make it easier to reach major life goals, while credit cards for smaller purchases can help build credit and possibly qualify for lower interest rates on those big purchases. SoFi unsecured personal loans have no fees and low fixed rates. Checking your rate takes just two minutes. Taking control of your financial future is possible by making conscious choices about credit now.

Trying to build your credit? Check your rates on a personal loan from SoFi.



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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website
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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. SoFi Lending Corp. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

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