How to Build Personal Credit: The Ultimate Guide
Last Updated on December 22, 2022 by Selina Parker
Are you looking to build personal credit? If you don’t have one yet because you still don’t need it, it won’t be long until you need to build credit. Personal credit is essential for many things, from taking out a personal loan to buying a car or a house.
Without it, you’ll be stuck relying on others to help you financially or will have to pay much higher interest rates. A good personal credit report can give you some negotiating power and peace of mind. Separating your business credit from your credit is essential if you have a business. The Fair Credit Reporting Act allows lenders to examine sole proprietors’ or small business owners’ credit reports for business purposes in some situations.
How to Build Your Credit
1. Pay your bills on time
Positive payment history is the most crucial factor in your credit scores. Your payment history accounts for 35% of your FICO credit score. So, if you’re looking to improve your credit score, the first thing you need to do is make sure you’re paying all of your bills on time.
One way to easily do this is by automating your payments. Connect your bank to the bill and have the funds automatically withdrawn each month of its due. This way, you won’t have to worry about forgetting to make a payment or being late.
2. Keep your credit utilization low
Your credit utilization is how much of your credit limit you’re using at any given time. If your credit limit is $200 and you are using $100, that’s a 50% credit utilization ratio. Keeping your credit utilization low — ideally below 30% — is important because it accounts for 30% of your credit score.
There are a few different ways you can lower your credit utilization. One is to pay down your debt, so you’re using less of your credit limits. Another is to ask for a higher credit limit from your lender, which will instantly lower your credit utilization without you having to do anything else.
3. Become an authorized user
Becoming an authorized user by a healthy and responsible person with good personal credit can help you boost your credit score. You’re piggybacking off their excellent personal credit history as an authorized user.
To become an authorized user, the person with good personal credit will need to add you to their account. Once you become an authorized user, your good personal credit history will become your good credit history.
Just make sure you’re added to an account with responsible personal credit habits, as their bad personal credit habits will also become your bad personal credit habits.
4. Get a secured credit card
One of the best ways to build personal credit is getting a secured credit card. Secured credit cards are for people with little to no personal credit history. They work like a regular credit card, but you’ll need to put down a deposit — typically $200-$500 — which becomes your line of credit.
Because a deposit backs secured credit cards, they’re much easier to get approved for than a regular unsecured credit card. And using a secured credit card responsibly will help you build personal credit to qualify for a standard credit card eventually.
5. Get a retail credit card
A retail credit card rewards you for shopping at a particular store. They usually come with great sign-up bonuses, such as getting a $100 gift card after spending $500 in the first three months. They also offer cashback, reward points, and air miles for your spending.
If you shop at a particular store often, getting their retail credit card can be a great way to earn rewards while building personal credit. Just make sure you’re only using the retail credit card for your regular shopping and not as a way to rack up debt.
6. Get a credit builder loan
A credit builder loan is a small personal loan from credit unions — usually around $500-$1000 — that you can use to build personal credit. It works because you will pay fixed monthly payments for the loan duration — typically less than 12 months.
You’ll put your money into a savings account, which you won’t be able to access until you entirely pay the loan. The credit bureaus receive the payments you make on your credit builder loan, which makes it a great way in building credit because it shows how responsible you are when borrowing money.
7. Request a credit limit increase
To lower your utilization ratio, you have to increase your credit limit or decrease your debt — ideally, you’ll do both. An easy way to instantly improve your credit limit is by asking your lender for a credit limit increase.
You can usually request a credit limit increase online or over the phone in just a few minutes. And if you have good personal credit, then there’s a good chance you’ll be approved.
8. Pay off any existing debt
Lastly, one way to help improve your credit is to pay off any existing debt. It will lower your credit utilization and show lenders that you’re responsible for borrowed money.
If you have a lot of debt, then you can use the snowball or avalanche method to pay it off. With the snowball method, you first focus on paying off your smallest debts. It motivates you to keep going because you’ll see your debt balances shrinking quickly.
With the avalanche method, you first focus on paying off your debts with the highest interest rates. It saves you money in the long run because you’ll be paying less in interest.
Both methods can work, so it’s really up to you to decide which one is best for your situation.
Building your credit is essential to qualify for loans, credit cards, and other financial products. Always remember that personal credit scores are different from your business credit scores.
By following the tips in this article and following good credit habits, you can build personal credit quickly and easily. Just make sure you’re using credit responsibly and making all your payments on time. Do that, and you’ll be on your way to a great personal credit score.
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