How To Build Your Credit: A Step-by-Step Guide

Building a positive credit background requires time, consistency, and financial discipline, but the payoff can be significant. A strong credit history can lead to greater purchasing power, lower borrowing costs, and access to housing or even job opportunities.

Despite the importance of building good credit, understanding how to get started isn't always straightforward. In fact, nearly 1 in 5 Gen Z adults say they don't understand how to manage their credit score, according to a 2024 FICO study.

Whether you're establishing credit from scratch or working to rebuild your credit, here are the best ways to build credit in a sustainable way.

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Why building credit is important

Credit helps lenders gauge how reliable you are based on your past borrowing habits. Establishing and maintaining good credit is like making a positive first impression. It can open the door to financial products like mortgage loans, car loans, private student loans, and personal loans. Strong credit also makes it easier to qualify for lower interest rates, which saves you money on debt.

Beyond borrowing, your credit might also be reviewed during other application processes, such as renting a property, setting up your home utilities, or applying for a new job. Your credit report gives lenders, landlords, potential employers, and service providers an itemized history and details of your active and closed credit accounts.

Another important factor is your credit score. This three-digit number provides a glimpse into your borrowing behavior. It's calculated using a credit scoring model that factors in data like your payment history, amounts owed, length of credit, and more.

Best ways to build credit from scratch

Building credit from scratch can feel like a catch-22 — you need credit to get credit. But in reality, everyone starts in the same place: “credit invisible,” meaning you don't have any credit history with the three major credit bureaus.

If you're eager to get your credit history started, the best way to build credit from scratch is through a controlled approach.

Open a secured credit card

A secured credit card offers the convenience of making on-the-go purchases using a credit card without the risk of spending beyond your means. To open one, you'll need to provide a small, one-time security deposit — often around $300 or less. This deposit acts as collateral and usually sets your credit limit.

You can then use the card for everyday purchases and make monthly installment payments as you would with a traditional credit card. All of the activity on the card — including card use and payment data — is reported to the credit bureaus, which generates a credit history under your name.

After proving responsible credit card use and repayment behavior over time, you might have an opportunity to qualify for a traditional credit card.

Become an authorized user on someone else's account

Becoming an authorized user on an existing credit card account can help you passively establish your credit from scratch. With this strategy, you'd ask someone you're close to — like a parent, sibling, or spouse — to add your name as an authorized user on their card. Although you're technically allowed to use the card, you don't need to make any personal purchases or payments toward it. Instead, you can simply piggyback off the primary account holder's account activity.

All purchases and payments the account holder makes on the card are reported to the credit bureaus. If the card issuer also reports authorized user data, that information will appear on your credit report and help you establish a credit history.

That said, this strategy only works if the primary account holder uses the credit card responsibly.

“Being added as an authorized user on a responsible person's account can help, but ensure the account has a low utilization rate and a long positive history,” says Justin Haywood, a certified financial planner (CFP) and co-founder of Haywood Wealth Management. “The primary account holder must maintain good payment habits for this to be effective.”

Get a credit-builder loan

Credit-builder loans are commonly available through credit unions. When you take out this type of loan, the lender locks the borrowed amount — usually $300 to $1,000 — into an account instead of giving you the funds up front.

You'll then make monthly installment payments, plus interest, for a term of six to 24 months. The lender reports the payment activity to the credit bureaus, which builds your credit profile. After successfully making all of your payments, the loan is considered repaid, and you'll get access to the funds in the deposit account.

How to improve your credit score over time

After building a credit history, the next step is to improve your score. A higher credit score signals stronger credit, which can help you qualify for better financial products and interest rates. Here are some credit-building tips for beginners:

• Make on-time payments: Payment history accounts for 35% of your FICO score calculation. Ensure you're paying at least the minimum amount due each month on or before the due date, and stay consistent month to month.
• Keep credit utilization low: Credit utilization refers to how much of your available credit you're using, and it makes up 30% of your FICO score. Aim to keep your credit utilization under 30%.
• Apply for new credit sparingly: How frequently you open a new credit account and the time between opening new accounts makes up 10% of your FICO score. Avoid opening new accounts in rapid succession just to establish your credit.

“Credit utilization is one of the easiest things to control, and it makes a huge difference in your score,” says Joe Camberato, CEO and founder of National Business Capital, a private lender that helps business owners secure competitive financing options.

“Even if you pay off your card in full every month, your balance at the time your statement closes is what gets reported, so keeping your spending low throughout the month helps,” Camberato adds.

Common mistakes to avoid when building credit

It's easy to slip into habits that cause your credit score to drop. Here are a few pitfalls to avoid:

• Missing or late payments: Payment history impacts your credit score the most, so you want to avoid making late payments or forgetting a payment altogether. If you're new to managing monthly bills, consider enrolling in auto-pay or setting up a reminder on your calendar to pay your credit card or loan bill each month.
• Closing old credit accounts too soon: The longer you responsibly maintain credit accounts, the better it is for your score. That's because the length of your credit history makes up 15% of your FICO score. If you're just starting to build your credit, avoid closing an account prematurely unless necessary.
• Taking on too much debt at once: Having the convenience and flexibility of a credit line can be tempting, but it can also lead to overspending. To build credit without racking up interest, start by making small purchases and paying them off in full each month.

How long does it take to build good credit?

There's no concrete timeline for building good credit. Whether you're starting from scratch or building after financial setbacks, the process can vary depending on your situation.

If you're rebuilding your credit after past missteps, the process is more nuanced. “Rebuilding credit is trickier because it depends on what damaged your score in the first place,” says Camberato.

“Bigger issues, like charge-offs, collections, or bankruptcy, take longer. Late payments stick around for seven years, and bankruptcies can last up to 10. It's a marathon, not a sprint,” he adds.