Having bad credit can make life difficult. For example, you may not be able to get a loan for a car or a home, and if you are approved for loans, the interest rates will be high. This can make it difficult to grow your net worth and can cause financial stress.
Luckily, there are many ways to build credit fast. The first step is to understand how credit works.
What Is Credit And How Does It Work?
Credit is a system that allows you to borrow money with the promise that you will repay it at some point in the future.
Credit works by reporting your borrowing activity to credit bureaus, who track how much debt you have and how well you are managing this debt. If your record shows that you pay on time and manage your debt responsibly, you will have a good credit score. Lenders use this score to determine whether or not to lend you money and at what interest rate.
There are two main types of credit: revolving and installment.
- Revolving credit (also known as open-end credit): This type of credit allows you to borrow up to a certain limit and then pay off the debt over time. This type of credit is often used for credit cards.
- Installment credit (also known as closed-end credit): This type of credit requires you to make regular payments over a set period of time until the loan amount is paid off. This type of credit is often used for loans, such as auto loans or mortgages.
What Is A Credit Score and How Does It Change?
In addition to knowing the different types of credit, it is important to know how your credit score works to build your credit fast. The most common scoring system is the FICO score, ranging from 300 to 850 points. This score comprises of five factors: payment history, amounts owed, length of credit history, new credit, and types of credit used.
- Payment history: This accounts for 35% of your score. This factor looks at how often you have paid on time and whether or not you are late with payments.
- Amounts owed: This is the second most important factor in determining your credit score, accounting for 30% of your FICO score. This factor looks at the amount of debt you have in relation to your available amount of credit. A high credit utilization ratio (the amount of credit you are using compared to your available credit) will lower your score.
- Length of credit history: This is the third factor, accounting for 15% of your FICO score. This factor looks at the length of time you have used credit and the age of your oldest account. The longer your credit history, the better your score will be.
- Your credit mix: This is the fourth factor, accounting for 10% of your FICO score. This factor looks at the variety of types of credit you have, such as credit cards, auto loans, and mortgages. Lenders like to see that you can handle different types of debt responsibly.
- New credit: This fifth and final factor accounts for 10% of your FICO score. This factor looks at how many new credit accounts you have and how many inquiries (requests for your credit report) have been made. Too many recent credit accounts or inquiries can be a sign of financial stress and can lower your score.
Now that you understand the basics of credit and how it works, here are 19 ways to build your credit fast.
1. Start Paying Your Bills On Time
The most important factor in building your credit is to make sure that you consistently pay your bills on time. Set up automatic payments from your bank account so that you never miss a payment. If you do miss a payment, make sure to call the creditor and explain the situation. Many creditors are willing to work with you to ensure that your account is brought current.
Missing a payment by 30 days or more can significantly impact your credit score. If a payment is missed by over 30 days, the late payment is reported to the credit bureaus. Depending on how severe, late payments can stay on your credit report for up to 7 years and will have a very negative impact on your score!
Remember, payment history accounts for 35% of your FICO score, so this is the most important step you can take to make sure you build your credit fast.
2. Never Use More Than 30% of Your Available Credit
Creditors typically recommend that your credit utilization ratio (the amount you owe compared to the amount of credit available) is kept below 30%. Keeping your credit utilization ratio low will help you build your credit fast, as it shows lenders that you can manage your debt responsibly.
One easy way to keep your credit utilization ratio low is to set up automatic payments. With automatic payments, you can schedule payments to post right after your statement closes so that your balance is always kept at your desired amount. Finally, try to aim to spend below 20% of your available credit to build your score quickly.
3. Get a Secured Credit Card
If you are just starting out and have no history of using credit, one option you can explore is getting a secured credit card. A secured credit card requires placing a security deposit with the issuer. This acts as collateral for your account and ensures that you will be able to pay back your debt.
Secured credit cards build your credit in two ways: first, the issuer reports your account activity and on-time payments to the major credit bureaus, which helps build your score.
Second, by using a secured card responsibly and making sure to make all of your payments on time, you can improve your credit utilization ratio, which is another factor that contributes to your score.
4. Get a Co-Signer
Another option for building credit if you have no history is to get a co-signer on a credit account. This could be a parent, guardian, or other family members who agree to be responsible for the debt if you cannot pay.
Co-signing is a big responsibility, so make sure that you are ready to commit to making all of your payments on time before asking someone to co-sign for you.
5. Use Your Credit Card Regularly
If you have a credit card but don’t use it regularly, you may be surprised to find that your credit score has started to drop. This is because creditors want to see that you are using your credit and managing it responsibly.
One way to build your credit quickly is to use your credit card for small purchases that you usually pay for with cash or a debit card.
These purchases can be things such as groceries or gas. Then, make sure to pay off your balance in full each month so that you are not paying interest on your purchases.
6. Pay Off Old Debts
If you have old debts that you have been unable to pay off in the past, it is essential to make sure that they are taken care of as soon as possible. Unpaid debts can negatively affect your credit score, so do your best to negotiate with creditors and set up a repayment plan if necessary.
Once you have taken care of old debts, ensure that any accounts on which you fell behind on payments are reported as “paid as agreed” on your credit report. This is because lenders want to see that you can manage all aspects of your credit responsibly, including paying off overdue bills.
7. Use a Joint Account With a Trusted Friend or Family Member
Like having a co-signer, if there is someone in your life that you trust and with whom you have a good relationship, consider opening a joint account to build credit. This could be an existing credit card where both of your names are on the account, or it could be a new line of credit opened specifically for this purpose.
Opening a joint account can help build your credit fast if you use it responsibly. Still, make sure to set up automatic payments so that you never miss a payment due date, and make sure to pay off your balance each month to avoid interest charges.
And most importantly, only open a joint account with someone who will ensure their share of the debt is paid off in full each month as well!
8. Get Credit For Rent and Utility Payments
In addition to credit cards, it’s also important to build your credit using other types of accounts. For example, if you pay rent, you may be able to build credit by having your payments reported to the major credit bureaus. There are a few different ways to do this, such as signing up for a service like RentTrack or Rental Kharma or working directly with your landlord.
Paying rent on time is a great way to build credit, so if you have the opportunity to have your payments reported, take advantage of it!
9. Use a Credit Builder Loan
A credit builder loan is a type of loan specifically designed to help build credit. With a credit builder loan, you borrow a set amount of money and make fixed monthly payments over a period of time. The lender reports your payment history to the credit bureaus, which can help build your credit score over time.
Choosing a reputable lender and ensuring that you make all of your payments on time can be the key to successfully building your credit with a credit builder loan. So do some research and shop around before taking out a loan to build credit.
10. Request a Higher Credit Limit
Your credit limit is an important factor in your credit score, so doing what you can to build it up can be a great way to build credit fast. One easy way to do this is simply by requesting a higher credit limit from your card issuer.
Many creditors will consider raising your limit for regular customers who have been using their cards responsibly. Of course, there is always a risk of overspending with a higher credit limit, so make sure that you are still using less than 30% of your total available credit every month. If you find yourself spending more than you can afford, work quickly to pay off any late payments or outstanding balances.
11. Consider Experian Boost or UltraFICO
There are a few different credit-building options that you may want to consider, depending on your unique situation. For example, Experian has a service called Experian Boost, which can help build your credit by allowing you to add utilities and telecommunications payments to your credit report.
Another option is UltraFICO, which can help build your credit if you have limited information in your report or no record of using credit.
Do some research and determine if either of these services could be right for you as you work to build up your credit score.
12. Keep Credit Cards Open
One common mistake people make when trying to build credit is closing old credit card accounts. While it may seem counterintuitive, keeping your old credit cards open can actually help improve your credit score over time!
When you close a credit card account, you lose the history associated with that account. This can shorten the length of your credit history, which can have a negative impact on your score.
Remember, the length of credit accounts for 15% of your credit score! So, if you have an old credit card that you don’t use anymore, consider keeping it open and using it sparingly so that you don’t lose your account history.
13. Add To Your Credit Mix
Another factor that can impact your credit score is the mix of different types of credit accounts you have. So if you only have one type of account, such as a credit card, consider adding a different kind of account to help build your credit.
For example, you may consider taking out a small personal loan or opening a secured credit card. These accounts can help improve your credit mix and build your credit score over time. Just make sure that you can make all of your payments on time and keep your balances low to avoid damaging your score.
14. Group Your Hard Credit Inquiries Into The Same Time Frame
If you are planning on applying for new lines of credit, it’s important to group your hard inquiries. This means applying for multiple forms of credit within a short period of time.
For example, if you plan on applying for a new credit card and a car loan, try to submit all of your applications within the same week. This will help minimize the impact of hard inquiries as most credit reporting agencies will view this as a singular inquiry.
15. Dispute Credit Report Errors
If you find errors on your credit report, it’s important to dispute them as soon as possible. These errors can hurt your credit score, so it’s essential to remove them from your report.
The best way to dispute these errors is by contacting the credit bureau directly and providing documentation to support your claim. Once the error is corrected, your credit score should improve.
16. Use A Credit Monitoring Service
Another way to build credit is by using a credit monitoring service. These services can help you track your progress and see where you need to improve. They can also help you identify errors on your credit report and dispute them quickly.
There are many different credit monitoring services available, so it’s important to do some research to find the right one for you. It would help if you looked for a monitoring service that is free and provides timely updates.
17. Check Your Credit Score Regularly
As you work to build your credit, it’s important to check your score regularly. This will help you track your progress and see where you need to improve. There are many different ways to check your credit score, so find the best method for you.
Some people prefer to use a credit monitoring service, while others prefer to check their score for free using a site like Credit Karma. Whichever method you choose, just make sure that you check your score regularly so that you can track your progress.
18. Request A Lower Interest Rate
Even if you don’t have good credit, you may be able to negotiate a lower interest rate on your credit card(s). This can save you a significant amount of money in the long run, so it’s definitely worth considering.
When requesting a lower interest rate, it’s important to be polite and professional. Be sure to provide documentation that shows why you are eligible for a lower interest rate, such as your payment history or debt-to-income ratio.
If your card issuer refuses, tell them politely that you will transfer your balance to a card with a lower interest rate if they don’t lower your rate. This may motivate them to give you a better deal.
19. Get Help From a Credit Counseling Service
If you are struggling to build or improve your credit on your own, working with a credit counseling service may be helpful. A good credit counselor will evaluate your financial situation, set up an action plan for improving your finances, and provide you with resources and support as you work towards reaching your goals.
Whether you need help creating a budget, reducing debt, or setting up automatic payments on bills, a credit counselor can be an invaluable resource. There are many options, but we recommend Cambridge Credit Counseling Corp due to their excellent customer reviews and the variety of services offered.
Building credit can seem daunting, but it doesn’t have to be. You can build credit quickly and improve your financial standing by following these tips. Just remember that improving your credit score doesn’t happen overnight. However, if you are patient and consistent, your score will improve over time.