How to Build New Credit

When you want to buy now and pay later, you need credit. Whether you’re building it from scratch or want to augment your current credit limit, there are options and strategies for getting new credit in place as quickly as possible.

Credit can be exasperating. A lot of times, it takes credit to build credit. So, what are you supposed to do when you don’t have any credit with which to start, or you don’t have the positive credit history you need to get a loan for a house or a car or any other major acquisition? It’s a dilemma.

But it isn’t hopeless. Establishing new credit and then using it might involve taking some baby steps (and some of those steps might take a little more time than you’d like), but it can be done. Here are some ways to make it happen:

• Ask a family member or a trusted friend to allow you to be an authorized user on their current credit card.
• Ask a relative or friend to be a cosigner on your own new card.
• Apply for a secured credit card of your own.
• Build a track record of paying your cell phone or utilities or streaming service bills on time.
• In a pinch, you can take out a credit-builder loan which requires you to make the payments on it before you get the lump sum of the loan.

We’ll dive deeper into the fastest ways to build credit a little later. But first, let’s make sure you’re up to speed on a handful of pertinent definitions and issues you might encounter during the process.

What Is New Credit?

Essentially, new credit is any loan or line of credit you don’t already have. If you don’t have a credit score or a credit history, all the credit cards or loans you take on are considered new credit.

But you can have an established credit history and credit score and still add new credit when you apply and are approved for a different credit card or successfully get a new loan for things such as a car or home.

There are three different types of credit, including:

• Lines of credit: These are arrangements between a financial institution such as a bank or credit union that presets a borrowing limit the customer can access as needed. With a line of credit, you can buy things by writing a check or using a bank card. You can get cash withdrawals when desired, too.
• Credit cards: They work like a line of credit in that they essentially are a personal loan for the consumer to use in an on-the-spot buy now/pay later situation.
• Revolving credit: This type of credit is a loan with a spending limit that refreshes as the debt is paid off. Most credit cards utilize revolving credit. Home equity lines of credit (HELOCs) and gas station, department store and other retail cards do as well.

Any time you add one of those credit types to your existing debts, it is considered new credit.

How Does New Credit Affect Your Credit Score?

New credit only accounts for 10% of an established credit score, so its role is less significant than, say, your payment history (35%) or your credit utilization ratio (30%).

Still, that 10% can make a difference, in either direction. New credit’s impact can increase your credit score, but it can also knock it down a notch or two. The negative consequences are especially pronounced if you’re just starting the process of building a credit history.

Either way, how new credit affects your credit score depends on several factors, including:

• How many different applications you’ve submitted for new credit at any given time. (Hint: Applying for more than a few new accounts in a short period of time will hurt more than it helps.)
• How quickly those applications are accepted and reported to the credit bureaus. (Hint: Nothing you can do about that. A lag between when you apply and when your application is accepted can cause a short-term drop in your credit score.)
• What you do with the new credit you’ve just acquired.

If it sounds confusing … well, it is. Remember, we began by telling you credit can be exasperating.

Here’s an example of how confounding it can be: A new credit card eventually will help your credit score … if you don’t use it! Or if you only use a tiny chunk of the amount of credit it provides you. Catch-22, right? It works that way because when you don’t use the new credit, your credit utilization ratio decreases.

At the risk of getting too far into these bewildering weeds, a credit utilization ratio is the total of your balances divided by the total of your credit limits. Example: You charged $250 on a credit card with a $1,000 credit limit. The math is: 250 ÷ 1,000 = 25%.

The credit bureaus look kindly on your credit score when you keep your credit utilization ratio at 30% or under. The lower the ratio, the less you’ll be considered a financial risk by the people and institutions who dole out your future credit. A new credit card raises your available credit limits, and not using it keeps your balances where they were. Voila! Your ratio is reduced.

There is another, and simpler, way new credit can increase your credit score. If the new credit you acquire is a kind you didn’t already have, it will improve your credit mix, which is another factor in your credit score. (Like new credit, it accounts for 10%.)

For example, when you take out a loan to buy your first car, or any other sort of first-time loan you pay back in installments, you’re adding to the types of credit you use. As long as you make the payments on time, a variety of different kinds of credit shows the credit bureaus that you’re a reliable risk.

On the other hand, new credit’s negative ramifications for your score can come into play when an institution (or institutions) to which you’ve applied pulls your credit report from one of the credit bureaus to help determine your risk level. Any future potential lender can see how often you’ve applied for new credit during that time frame, and it might raise questions. The more credit applications you submit in a short period of time, the greater the risk you might be as a borrower, in the eyes of lenders.

So, until you’ve proven that you are reliably managing those new debts, the bean counters who tabulate your credit score can penalize you for going after multiple new credit accounts.

What Are New Credit Inquires?

That process we just described in which potential lenders pull your credit report to determine your creditworthiness? They’re called hard inquiries, and every one of them stays on your report for two years. They’re hard to avoid when you’re in the market for new credit because you usually need to give a potential lender permission to pull your credit report as part of the credit or loan application process.

Another kind of check on your credit report can occur under your radar, when you haven’t given permission for it to happen. It’s called a soft inquiry, or a soft credit pull. It can happen during a background check as part of a job application or an apartment rental process, or when a company is looking for possible customers who might respond to an unsolicited offer of a pre-qualified credit card.

In most cases, soft inquiries don’t appear on your credit report. Even if they do, they won’t negatively affect your credit score.

Strategies for Building New Credit Fast

OK, that was a lot of background info, and we know you want to get to the game plans we mentioned up top for the fastest ways to build credit. But humor us for just a moment longer, because it would be irresponsible of us not to lay out credit-building Rule No. 1, which isn’t necessarily hard-and-fast.

Rule No. 1 is fundamental: For whatever credit you already have and intend to acquire, make the payments on time. A history of up-to-date payments is the surest, safest road to a good credit score, and a good credit score is the surest, safest road to new credit. That can take time; it’s a history, after all. But the more reliability you can show to lenders, the better the opportunities you’ll find for adding new credit.

So now, at long last, here are some details on five ways to build credit fast for beginners or for credit veterans who are trying to climb back out of a deep, dark, debt hole.

Apply for a Secured Credit Card

The key word here is “secured.” It means you give a lender some financial security up front by way of a cash deposit, in exchange for a credit card. The limit on your card will match the amount of cash you deposit. You will be able to use the card in buy now/pay later situations just as you would a conventional, or unsecured, credit card. When you don’t have much of a credit history, a secured credit card is easier to obtain than the usual unsecured card.

You’ll make payments, including interest, on periodic due dates, as you do with unsecured cards. If you’re dependable about it, you’ll build toward a positive credit history and eventually qualify for unsecured cards. That could happen in a year or less. You’re off and running!

Apply for a Secured Loan

A secured loan helps develop your credit score while it minimizes the risk to the lender. You provide the security either in the form of cash or collateral such as your car, which in turn makes a secured loan attainable even if you don’t have a credit history or you have a record of missing payments on your debts. As you pay back the loan on time, your credit score gets healthier.

Another kind of loan, known as a “credit builder loan” can work for you, too, although it involves some delayed gratification. A credit-builder loan is specifically designed to help people assemble, or re-construct, their credit.

It’s an unsecured loan that works differently than conventional personal loans in that the amount of the loan is placed in a savings account, out of your reach, until you’ve paid it off in installments. Each time you meet a deadline with a payment, the lender (usually a community bank or credit union) gives the credit bureaus a glowing report about your trustworthiness, and your credit score grows.

The terms normally are short, and the dollar amounts normally are low ($1,000 or less), so this kind of loan can make a difference reasonably quickly. And when your payments are complete, you get all the money plus interest.

Of course, if you don’t make those payments on time … well, that won’t happen, will it?

Become an Authorized User

You need help with this one. That’s what family is for, after all. Someone you trust (or, maybe more accurately, someone who trusts you) might be willing to make you an authorized user on his or her established credit card. When that happens, your name is on the credit history associated with that card.

Assuming the primary cardholder has been making payments on time, you’ll start accumulating points toward a credit score that will open new credit doors for you. A word of caution: becoming an authorized user on a card that is constantly in arrears, will work against you.

Another caveat about being an authorized user: If you’re making your own charges on the credit card, you should be prepared to pitch in your share of the monthly payments. Fair’s fair.

Receive Credit for Monthly Utility and Cell Phone Payments

Let’s say that, for whatever reason, getting your own credit card (or becoming an authorized user on someone else’s card), isn’t possible. Or maybe you want to try multiple options at once. You can bolster your credit report by making sure the credit bureaus know you’re paying your regular bills on time.

There are several services that will facilitate that communication for you, though they’ll likely charge you a monthly fee. Experian, one of the three credit bureaus (Equifax and TransUnuion are the others), allows your utility and cell phone bills to be used this way through a service called Experian Boost.

Other services, such as Rental Kharma and Level Credit, can help you let the credit bureaus know you’re paying your rent on time. It’s worth asking your bank or credit union if they offer any of these credit-building tools.

Every little bit of positive information you provide can bump up your credit score and help you get closer to a loan or your own credit card.

Use a Cosigner

Finding a cosigner for a loan or an unsecured credit card might require you to rely on the kindness of a family member or close friend. With a cosigner who has an established positive credit history and good credit score, you can procure your own new credit.

But, of course, you’ll put your cosigning family member or close friend in credit peril if you don’t pay the bills. If you don’t pay, the cosigner is liable for your debts. That’s a quick way to turn your cosigner into an estranged family member or a distant friend.

Considerations Before Applying for New Credit

Maybe we should talk a little bit about timing here, as in: When is the right time to apply for new credit? This will probably sound like a ‘well, duh’ answer, but the right time to apply for new credit is when you need new credit.

That could be when you’re just striking out on your own and want to build credit fast to start your financial life. It could be later on when you get serious about fixing your established, but troubled, financial affairs. Or it could be when you’ve outgrown your current credit limits and want to expand their reach. In any of those cases, you’ll want to take into account how your new credit will affect the health of your credit score.

Beyond that, there is no fast answer. You’re the only one who will know when you need new credit.

We can reiterate, though, that you likely won’t be doing your credit score any favors if you make multiple applications for new credit, whether it’s in the form of new credit cards or new loans, in a short period of time. To avoid potential damage to your credit score from the numerous hard inquiries those applications will spawn, you should probably let at least three months pass between your last credit card application and your next one. Six months might be better.

Some of the factors to consider as you decide whether to apply for new credit include:  

• Your credit score: We keep bringing this up for a reason. You should know what it is and what you want it to be when you apply for new credit. The higher your score, the better the terms (interest rate) will be.
• Your credit utilization ratio: Yes, there is math involved. But it will help you make good choices about what to take on if you can calculate your balances against your credit limits and spend 30% (or less) of your credit limit each month.
• Your current balances: If you’re having trouble making the payments on the credit you already carry, then taking on new debt obligations might not be the smartest move, especially if you’re an impulse buyer.
• Your future needs: Take a look down a short road. If you see an application for a mortgage or some other sizeable loan looming large, then efforts to obtain new credit cards in advance of that won’t help.
• Annual fees: Many credit cards charge them. If you can afford it, fine. But if your credit score is non-existent or in trouble, your best bet is a no-annual-fee card. It’ll make building up your credit history a little less painful.

Speak to a Credit Counselor About Building New Credit

We all wish this was simpler, but it just isn’t. With apologies to Winston Churchill and the Soviet Union, new credit can be a riddle wrapped in a mystery inside an enigma. There is no reason you need to try to solve it on your own.

Credit counseling from a nonprofit agency certified by the National Foundation for Credit Counseling is a quick way to help you sort it all out, and the service is free. Among other benefits, a counselor can help you get a copy of your credit report and scores, as well as offer advice on creating a budget and managing your money and debts.

It’s an excellent starting point on your journey to smart credit solutions. Counselors are trained and certified in the areas of budgeting and consumer credit. They will help you find answers to your questions, and they can even develop a personalized plan to send you on the way to solving your money problems.