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How to Build Credit Over Time

December 23, 2017 · 5 minute read

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How to Build Credit Over Time

Building credit is a lot like being a painter. (This is a good analogy, stick with me here.) If you ask someone to judge your painting, it’s easier for them to offer an informed opinion when you show them a finished painting and not a blank canvas. Some of your brushstrokes, particularly the first few, may be messy. But over time, you can cover them up and create a masterpiece you would be proud to show anybody.

That makes lenders like art critics. They want to see more than that blank canvas. And they can tell more about your worth as a painter if you show them more of your paintings. They want to see what you’ve done, and identify areas where you can grow (in this case, as a borrower, not an artist).

Many people get their start building credit through student loans, which is an excellent way to start. To build credit successfully, you want to make every payment on time. The basic strategy for good credit is actually quite straightforward and intuitive: Be the kind of borrower you would want to lend to.

Step 1: Start by acquiring some credit.

When you’re just starting out, 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). In the long run, however, you will be in a much stronger position if you keep as much borrowing as possible in your name (and only your name).

Credit cards don’t require a co-signer in most cases, so they can be a great place to start on your own. Eventually, this can extend into an auto loan, a personal loan, or even a mortgage.

Step 2: Pay your bills consistently and on time.

Payment history makes a bigger impact on your credit score than anything else. Your credit score summarizes your 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. Seriously.

Timely payments are crucial, and for the most positive impact on your credit score, you want to pay the total amount due every time. (For example, if your student loan payment is $100 per month, you don’t want to pay only $50 some months.)

However, missing the occasional due date is not the end of the world. Especially over time, your credit history will be long and deep enough to paper over the occasional late payment. Many lenders will actually allow you to customize your due dates if you find it’s easier to line them up with paychecks. Most let you set up automatic payments from a checking or savings account. Take the time to find the mix that works for you and keeps your accounts up-to-date.

Step 3: Nudge your credit limits upward, even if you’re not using them.

Speaking of raising your credit card limits, even if you don’t expect to need a higher limit, it’s a good idea to work towards one. That’s because the further away you are from hitting your credit limit, the healthier your credit score will be.

In general, credit card balances should not be over 35% of the total credit limit. That percentage is called the utilization rate. Higher utilization rates can negatively affect your credit score. So higher credit limits give you lower utilization, and a better score.

Step 4: Don’t close old credit cards.

Lenders want to see that you can maintain accounts in good standing for a long time. When you close borrowing accounts, though, that history ends, and eventually closed accounts drop off the credit report entirely. Your credit history looks better when it has a solid number of accounts in good standing that have been open for a long time.

The easiest way to get there is to keep your old credit cards open, even if you’re not using them anymore. You can keep these cards open and just automate a few bills (car insurance, Spotify premium, etc.) to make it look like they are still very much in use. Don’t forget to keep paying them off on time and in full. The only time you may want to consider closing a card you don’t use is if the annual fees are so high that it isn’t worth it to keep the card open.

Step 5: Boost your credit mix, when possible.

Lenders like to see borrowers with a diverse mix of credit products. 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 your standing as a borrower, you don’t want to open a line of credit you don’t need.

If you’ve never had a personal loan, and want to finance a large purchase (home renovation, hospital bill) with a relatively low interest rate, it’s good to know that paying off that personal loan on time will help boost your credit. Student loan refinancing can also diversify your credit mix and potentially lower your interest rate and monthly payments.

Step 6: Check your credit report.

It’s easy to get a free annual copy of your credit report from the three major bureaus. Reviewing them on a yearly basis is a good way to understand your overall credit health.

Any time you’re turned down for credit, you can request a free credit report. That applies even to relatively minor setbacks, like being turned down for a higher limit on a credit card. Turn those minor setbacks into free peeks at your full, up-to-date credit history, and make sure that all the credit listed there is accurate. When you find errors or fraudulent accounts, you can report them, and keep your credit score in good shape.

Step 7: Pace yourself on applications.

When you’re making major life changes, like starting a job, getting married, having children, or all three at once, sometimes you need multiple lines of credit to get through it all. Financial institutions get 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. That’s especially true if you’re just starting out as a borrower.

So spread out your credit applications over time whenever possible. New borrowing has a small impact on your overall credit score, but it is a factor to keep in mind.

Step 8: Enjoy your flexibility and freedom.

Once you establish good credit, use it wisely and responsibly. Good credit gives you flexibility and freedom. Installment loans like mortgages, car loans, and student loans make it easier to finance large, life-altering purchases, while credit cards for smaller purchases over time can help you build credit and eventually qualify for lower interest rates on those big purchases. Remember, you can take control of your financial future by making conscious choices about your credit now.

While you’re in the process of building credit, if you need to finance a large purchase or consolidate high interest debt, consider a personal loan as an option.


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 on credit .
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