How to Build a Strong Credit Foundation

If you're in the process of elevating your credit, you know how frustrating it can feel. Gaining access to the "Good Credit Club" can feel like you're in permanent detention—your journey to reach next-level status where the next rung in the ladder is missing.

With good credit, you can potentially land the lowest interest rates and most attractive terms on credit cards, loans, and other forms of financing. A lower credit score typically means higher interest rates. Borrowing can be significantly more expensive.

A strong credit foundation can give you access to financing which can help you reach your goals and sync your dreams to your reality. Here, we'll walk you through some basics and our top credit building tips:

Understanding Credit Scores

In a nutshell, a credit score is a 3-digit number that is determined by weighing key factors and information in your credit report. Credit scores range from 300 to 850. Higher numbers indicate you have better credit. On the flip side, lower numbers indicate poorer credit.

The three major credit bureaus or credit reporting agencies—Experian, Equifax, and TransUnion—gather information about consumers like yourself and organize the data to create credit reports.

This is a bit of a head-scratcher, but there isn't a single scoring model. There are two main ones: the FICO® Score and VantageScore. While both are widely used, 90% of the top lenders use the FICO Scores. Within the FICO and VantageScore, there are dozens of scoring models — VantageScore has four different models, and FICO has 40.

There are a handful of differences between them. For one, FICO was developed by the Fair Isaac Corporation, while all three main credit bureaus launched an independently managed joint venture and developed VantageScore.

While the factors and exact mix of the factors that determine a credit score vary slightly between the FICO and VantageScore, the factors are similar.

Let's take a look:

FICO Score

• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Credit mix: 10%

VantageScore 4.0

• Payment history: 41%
• Utilization: 20%
• Age/mix: 20%
• New credit: 11%
• Balance: 6%
• Available credit: 2%

What to Do When Building Credit Starting from Scratch

If you're someone with no credit history, here are a few ways you can start building your credit:

• Make on-time payments
• Improve your credit mix
• Become an authorized user on someone's credit card

As we discussed, your credit mix is a key element of your credit score, making up 10% of your FICO Score. Here are two ways you can diversify your credit by adding different types:

Secured credit cards. A secured credit card is a type of revolving credit that requires you to secure it with a cash deposit usually in a savings account or certificate of deposit, which serves as collateral. The collateral acts as a safeguard to protect the bank from risk should you default.

Usually, the security deposit is the same as your credit limit. So, if your cash security deposit is $500, your credit limit is also $500. Because secured cards have collateral, they can typically have less strict lending criteria. In turn, it can be easier to get approved for a secured card if you're working on building your credit. When you pay your monthly credit card bill on time, your positive payment history can then help better your score.

Credit builder loans. As the name implies, a credit builder loan is an installment loan that lets folks with not-so-stellar credit or no credit history to build a positive credit history. They're similar to other installment loans except for one major difference: Instead of getting the loan proceeds upfront, you only get your money, minus interest and fees, once you've completed all your payments.

With a Self Credit Builder Account, your money is secured in a certificate of deposit (CD). Each month, your monthly payments are reported to the credit bureaus. As mentioned, your payment history makes up the largest chunk of what determines your credit score. Over time, your on-time monthly payments to your Credit Builder Account can help build your credit.

Strategies to Build Your Credit Score

First, we'll start with the broad strokes—general, tried-and-true tactics to lift your credit score.

Make on-time payments. You'll want to stay on top of all your payments—credit card balances, student loans, car loans, personal loans, and the like. As mentioned, your payment history makes up the largest factor of what gets determined in figuring out your credit score.

If you need help paying your bills on time, consider moving your payment due dates. Depending on the credit card issuer, you can change your payment due date through your mobile app or dashboard, or by reaching out to the issuer and making the request. By contacting the lender or card issuer to see if they're willing to change your due date, it can help make it easier to stay on top of payments.

Credit utilization. Your credit utilization ratio, or credit usage, calculates how much you owe by the max amount you can borrow on all your credit cards. For instance, if your total credit limit is $10,000 and you have a $2,500 balance on all your cards, your credit utilization is 25%.

Keeping your credit utilization ratio low is crucial to having a solid score. The lower your credit usage, the better. However, the general rule of thumb is to do your best to keep your credit usage at no higher than 30% and ideally under 10%.

While it's a general rule to keep your credit usage under 30%, there's actually no hard data that points to the fact that your credit score will go down once your usage goes over the 30% mark. Plus, note that the impact that your credit utilization has on your score hinges on a handful of factors.

Consider increasing credit limits. Bumping up your credit limit can help your credit utilization score. For example, if you have a $2,500 balance on your cards, raising your total credit limit from $10,000 to $12,500 will reduce your credit usage from 25% to 20%.

If your credit score has grown recently, and you've had a track record of making on-time payments, the card issuer will be more inclined to give you a credit limit increase on your credit card accounts.

Keep old accounts open. The length of your credit also is a factor that plays into your credit score. Keeping old accounts open can build your credit even if you use the card sparingly.

FICO takes into consideration how long your accounts have been open. This includes three main components: the age of your oldest account, the age of your youngest account, and the average age of all your accounts.

If you want to keep a less-frequently-used card active, link it to a smaller recurring bill, then pay the balance in full each month. Or aim to use it every so often.

Three Credit Building Tips

Now that we've talked about basic strategies for elevating your credit score, we'll go over three credit-building tips:

1. Diversify your types of credit. As mentioned, when you have a mix of credit—credit cards, car loans, a mortgage, credit builder loans—this can show you can handle different types of credit responsibly. This can enhance your credit profile and can lift your score.

You can diversify your credit by responsibly adding on a new loan or line of credit. The key word here is "responsibly." Only take on debt that you can handle. Carefully pore over the terms, interest rates and fees. Last, come up with a payment plan and stick to it. Otherwise, you could risk falling behind on your payments, damaging your credit.

2. Get added as an authorized user. When you get added as an authorized user on another person's account, you can use their credit card to make purchases. However, you're typically not financially responsible for paying off the balance with the credit card company—that's the primary account holder's job.

That said, it's a good idea to talk with the primary cardholder about your end of the bargain when it comes to paying for your card purchases. Are you entirely responsible for all the purchases you make on your card? If so, do you need to pay for all your purchases in full by the next payment due date?

The beauty of this is that if the account holder makes timely payments and has strong credit, their positive financial activity and solid credit can lift your credit profile.

Being added as an authorized user is simple: you usually need to provide your name, mailing address, and Social Security Number. The card holder will use that data to add you to their account on their end.

If you are being added solely to build your credit, depending on the card issuer the primary account holder might be able to lock your access to using the card. In turn, you won't be able to make purchases, but your credit can still be possibly lifted as it's linked to theirs.

3. Using rent and utility payments. When you report your rent and utility bill payments to the credit bureaus, your on-time payment history can elevate your credit score. Some landlords provide this benefit through third party providers, as part of your lease. If your landlord does not offer this service, you'll need to sign up with a third-party platform to have your rent reported.

Self offers rent reporting to all three bureaus for free. There's no hard credit pull or credit score required. For a fee, you can add reporting utility and cell phone payments to TransUnion.

Monitoring and Maintaining Your Credit

Keeping a close watch on your credit can help you maintain a good score. You can detect errors and be clued in on what types of financial behaviors and habits elevate your score—and which ones can lower it. For instance, seeing your credit score take a dip because your credit utilization is high or when you miss a payment.

If you're curious where you stand credit wise you can order a credit report for free from AnnualCreditReport.com. Currently, you can do this weekly.

When looking over your credit report, you'll want to check for any missing or inaccurate information. If you spot anything wrong or missing, you can contact the credit bureau to dispute the error. You'll need to reach out to them separately. The credit bureaus have 30 days to investigate your dispute. Beware of anyone who claims that they can remove information from your credit report that’s current, accurate and negative. It’s probably a credit repair scam.

Start Growing Your Credit Score, Today

Whether you're starting from scratch or rebuilding your score, there are plenty of ways you can lift your credit. Knowing the basics of what a credit score is and how it works, and practicing strategies such as maintaining a history of on-time payments and a mix of credit can provide a one-two punch to elevating your credit.

Remember: Bumping your credit score is not an overnight process. Being proactive and applying these credit-building tips can help you slowly but surely upgrade your score. Ultimately, you can gradually level-up to a sound place with your credit, which gives you access to more affordable financing. Not only with lower interest rates can it help put more cash in your pocket, but it can offer you a boost to reach your dreams.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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