How to Build Credit at Any Age
How you build credit depends on your life stage and financial goals.
The younger you start assuming responsibility for your credit, the more credit history you’ll build, which is a main factor that contributes to your credit score. Once you start building credit, it will take about six months for the major credit bureaus (TransUnion, Equifax, and Experian) to give you a credit score.
Credit scores usually don’t impact your day-to-day finances, but they do become important in a couple of key areas. They’re primarily useful when you’re buying a house, securing a car loan, or applying for a favorable credit card. A good credit score will allow you to qualify for lower interest rates. Building credit early will also save you money and headaches in the future.
“The best time to repair the roof isn’t when it’s already raining,” says Matt Goren, Ph.D., an assistant professor of financial planning at The American College of Financial Services. “Build up your credit when things are good and you can handle using a credit card or taking on debt.”
What factors make up your credit score?
A FICO score is a credit score given by the Fair Isaac Corporation ranging between 300 to 850.
Your FICO score is calculated using the following factors:
- Debts owed; 30%
- Payment history: 35%
- New credit: 10%
- Length of credit history: 15%
- Credit mix: 10%
3 ways build credit if you don’t have a credit history
Aim to build your score up to 600 if you’re new to the process and just starting off with building credit, Goren says. No matter your age, there are a couple of ways to build your creditworthiness if you're just starting off.
1. Secured credit cards
If you don’t have a credit score or have a low one, some credit card companies won’t issue you an unsecured card, which is a card that does not require a security deposit to open. An alternative option a secured card that does require a security deposit to open. The money you put down on a secured credit card acts as an insurance policy in case you default on your payments.
The limit on a secured card is the size of the deposit the card issuer hands over. A secured card can help establish your credit history so you can eventually qualify for a more traditional credit card.
2. Become an authorized user on a family member’s card
As an authorized user, you can piggyback on a parent or relative’s good credit history, which can raise your credit, as the account is added to your credit report. When they pay their credit card statement on time, your credit report will benefit too.
The primary cardholder holds responsibility for the credit card. However, if they don’t practice good credit habits, you as an authorized user will feel the negative effects.
3. Credit-builder loans
If you need to show payment history and don’t have any outstanding credit, consider a credit-builder loan, which are sometimes called fresh start loans. With credit building loans, you won’t receive the money until the loan is paid off. They are specifically designed to help you build credit and demonstrate you are a responsible borrower.
“It’ll help you build credit in a short amount of time if you make on-time payments,” says Reilly White, Ph.D., an associate professor of finance and Endowed Bank of America Lecturer at the University of New Mexico.
How different generations can build credit
Whether you are just starting out on your own financial path or trying to improve a dire credit situation, here are some tips to help each generation establish a good credit history.
The Pew Research Center defines Generation Z as those who were born after 1997. If you're in this cohort, you may be navigating the financial challenges of college expenses, opening your first bank accounts or credit card, or making your first adult financial decisions.
Student loans: Student loans are installment loans and do appear on your credit report. Student loans can add to your credit mix, the length of your credit history, and payment history.
“A sure-fire way to start out building credit is paying your student loans on time,” Goren says. While it is better to not have debts, paying your student loans on time can actually help your credit score improve faster.
Credit cards: If you’re a college student, many credit card companies will relax their traditional standards when issuing you that first credit card. There are also many card issuers that offer student credit cards. Card issuers may give students easier access to credit because they don’t have a lengthy history of bad credit.
“Many credit card companies will allow students to build credit, even though they wouldn’t normally qualify,” Goren says.
Credit card debt can severely impact your credit score because you don’t have a lengthy credit history yet, so it’s important to use credit cards maturely. In the 2019 Money Matters on Campus Report, 36% of college students had more than $1,000 in credit card debt.
“Treat your credit card like a debit card and your score can increase dramatically in nine months,” Goren says.
Millennials & Generation X
There are sometimes disagreements about what age groups make up Millennials and Generation X, as some older Millennials may or may not have been introduced to the same technologies as the younger ones in the group. For the sake of consistency, let’s stick with Pew’s analysis, which considers “anyone born between 1981 and 1996 (ages 23 to 38 in 2019)” as a Millennial, and anyone born between 1965 and 1980 as Generation X. If you fall into one of these groups, you may have an established credit history -- for better or for worse.
Fix errors on your credit report: If you’ve used credit for many years, you may have incurred some bad marks or errors on your credit report. While credit reports last a long time, they’re not forever. Your score will usually increase after filing a dispute to eliminate erroneous information.
“Once these bad events go away, your credit score will increase, but if you truthfully messed up your credit, you are stuck with those bad marks,” Goren says. Negative items on your credit report will remain for seven years. Bankruptcies will disappear after 10 years.
Home Equity Line of Credit (HELOC): For homeowners, taking out a HELOC can improve your credit utilization ratio by increasing your available credit. A better credit utilization ratio can improve your credit score. This option is more feasible for the 29-53 year old demographic, as they represented half of all homebuyers, according to the 2019 Home Buyers and Sellers Generational Trends Report.
Baby Boomers & retirees
Baby Boomers are defined as the post-World War II generation. If you fall into this group, you may be close to retirement, if you haven’t retired already.
Maintain the credit you’ve built in case of emergencies: If you’re not planning on a major purchase like a house or car, it may seem as if your credit score doesn’t matter anymore. Maintaining your credit score can give you more options for credit if you do need it, so it’s still important to continue paying bills on time.
“We can’t anticipate the future, even if you’d paid off the house and you feel financially comfortable,” says Jeff Arevalo, a financial wellness counselor with GreenPath Financial Wellness. “It only takes one unexpected expense to put you in a position of difficulty.”
Maintain your credit cards: If your credit isn’t in the best place as you reach retirement, keep your credit cards intact to continue the long credit history you’ve built. Pay attention to your credit limit and don’t carry over a balance.
“The key is to keep two or three credit cards active and pay them off month to month to maintain or improve your credit score,” White says.
Limit new debts: It’s common for seniors to want to help out relatives or their children financially. White urges seniors not to cosign on a relative’s loans or mortgages.
“As you reach an older age, there’s a tendency to feel as if you need to provide for other people and so you end up taking on more debt, “White says. Additionally, co-signing a loan can make you responsible for the loan if the primary borrower defaults. Do you want that responsibility?
No matter your financial situation, practicing good credit habits, such as making timely payments, keeping down credit utilization, and diversifying your credit mix, can coincide with specific stage-of-life credit goals.