8 Accounts That Build Credit and 3 That Don't
Written by: Jacob S.
Published on:
Building strong credit is essential for achieving financial goals like buying a home, qualifying for loans, or even securing lower interest rates. Understanding which accounts contribute to building credit can help you make informed decisions and establish a strong financial foundation.
Key Takeaways
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These types of accounts, including car loans, personal loans, and mortgages, help establish a solid credit history through regular, on-time payments. They contribute positively to both your credit mix and payment history.
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Responsible use of unsecured and secured credit cards, as well as personal and home equity lines of credit, helps demonstrate creditworthiness and contributes to building a strong credit profile.
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Rent payments, utility bills, debit cards, and prepaid cards typically don't affect your credit score unless reported or if they go into collections. Only borrowing-based accounts, like loans and credit cards, are considered in credit scoring.
Installment Loan Accounts That Build Credit
Installment loans are borrowed funds that you repay in fixed amounts over a set period. These accounts provide stability and predictability, making them a great tool for building credit when managed carefully.
1. Credit Builder Loans
Credit builder loans are tailored for individuals looking to establish or repair their credit. They work by holding a borrowed amount in a secure account while you make monthly payments. These payments are reported to the credit bureaus, helping you build a positive payment history. Once the loan term ends, the funds are released to you. This unique structure turns your payments into savings while strengthening your credit score. Credit builder loans are particularly useful for those first time loans with no credit history or those with a limited credit history.
- You borrow a small amount, which is held in a secure account.
- You make monthly payments, and once the loan is paid off, you gain access to the money.
- Payments are reported to the credit bureaus, helping to establish a positive payment history.
2. Car Loans
Auto loans are another effective way to establish credit. Regular, timely payments demonstrate reliability and add diversity to your credit mix—a factor that credit scoring models consider. However, it’s essential to budget carefully and avoid borrowing more than you can afford, as missed payments can have significant negative effects on your credit score.
- You demonstrate creditworthiness.
- You diversify your credit mix, which can positively impact your score.
3. Personal Loans
Personal loans provide flexibility for expenses like consolidating debt or covering emergencies. When used wisely, they can boost your credit profile. Regular on-time payments contribute to your payment history, while the loan itself diversifies your credit mix. However, avoid over-borrowing and always prioritize repayment to ensure a positive impact.
- Payments are reported to credit bureaus, contributing to your payment history.
- They add to your credit mix, which is a factor in your credit score.
- Managing them well shows lenders you can handle different types of credit.
4. Mortgages
A mortgage represents one of the largest installment loans most people take on, but it’s also one of the most impactful for credit-building. By consistently paying on time over the course of the loan term, you build a robust payment history, which is the most significant factor in your credit score. Successfully managing a mortgage not only strengthens your credit but also shows lenders that you can handle long-term financial commitments.
- Timely mortgage payments have a substantial positive impact on your credit score.
- They demonstrate long-term financial responsibility and stability.
- A mortgage contributes significantly to your credit history length, a key factor in your overall credit score.
Revolving Accounts That Build Credit
Revolving accounts allow you to borrow against a set credit limit and repay at your own pace, as long as you meet minimum monthly payments. They are an excellent way to demonstrate responsible credit use.
5. Unsecured Credit Cards
Unsecured credit cards are one of the most common credit-building tools. To use them effectively:
- Keep your balances low, ideally below 30% of your credit limit, to maintain a healthy credit utilization ratio.
- Pay your balance in full each month whenever possible to avoid interest charges.
- Always make payments on time, as even one missed payment can hurt your credit score.
6. Secured Credit Cards
If you’re new to credit or recovering from financial setbacks, secured credit cards offer a safe starting point. These cards require a cash deposit as collateral, which also acts as your credit limit. Responsible usage—making payments on time and keeping balances low—can help you graduate to an unsecured credit card over time.
Secured credit cards are ideal for people with no credit or poor credit, as:
- They’re easier to qualify for than unsecured cards.
- Payments are reported to credit bureaus, helping to build a positive credit history.
7. Family Members’ Credit Cards
Becoming an authorized user on a family member’s credit card allows you to:
- Benefit from their positive payment history.
- Build credit without taking on the responsibility of a full account.
- Ensure the primary cardholder is reliable, as their activity affects your credit score.
8. Personal and Home Equity Lines of Credit
Lines of credit function similarly to credit cards and can build credit when used wisely:
- Personal Lines of Credit. These unsecured lines of credit provide financial flexibility for various needs. Consistently repaying borrowed amounts on time strengthens your credit history and payment record.
- Home Equity Lines of Credit (HELOCs). Secured by your home, HELOCs can be used for significant expenses. Regular, on-time payments improve your credit score while leveraging the equity in your property.
Using these tools responsibly demonstrates creditworthiness and contributes to a well-rounded credit mix.
Types of Accounts and Bills That Don’t Build Credit
Not all financial accounts and bills contribute to your credit history. Here are some examples:
1. Your Rent
Rent payments typically don’t appear on your credit report unless your landlord reports them to a credit bureau or you use a rent-reporting service. If you want rent to count, consider signing up for such a service.
2. Bills That Don’t Come From Borrowing Money
Utilities, phone bills, and subscriptions generally don’t impact your credit unless they go to collections. To avoid negative marks, ensure these bills are always paid on time.
3. Debit Cards and Prepaid Cards
While useful for budgeting, debit and prepaid cards don’t involve borrowing and therefore don’t build credit. They aren’t reported to credit bureaus and won’t affect your credit score.
Build Strong Credit With a Trusted Partner
If you’re starting from scratch or rebuilding credit, working with a trusted financial institution or lender can help. Products like credit builder loans, secured credit cards, and financial education resources can guide you toward your goals.
How to Build Credit for a Dependent
Helping a dependent build credit early can set them up for long-term financial success. Strategies include:
- Adding them as an authorized user on your credit card.
- Co-signing a credit builder loan or secured credit card.
- Educating them on the importance of paying bills on time and managing credit responsibly.
How to Build Credit with No Credit
Starting from zero? These steps can help:
- Apply for a secured credit card.
- Take out a small credit builder loan.
- Use tools like rent-reporting services to include nontraditional data on your credit report.
How to Build Business Credit Without Using Personal Credit
To establish business credit independently:
- Apply for a business credit card or line of credit in your company’s name.
- Open accounts with vendors that report to business credit bureaus.
- Separate personal and business finances to create distinct credit profiles.
Related Frequently Asked Questions (FAQs)
People also ask these questions about building credit.
Can You Build Credit Without a Credit Card?
Yes! Credit builder loans, rent-reporting services, and installment loans like auto loans can all help you build credit without a credit card. These methods allow you to establish a strong credit profile without relying on traditional credit cards.
How Do You Build Good Credit Fast?
Strategies include:
- Paying down existing debt to lower your credit utilization.
- Disputing any errors on your credit report to ensure accuracy.
- Making all payments on time, as payment history is the most significant factor in your score.
- Becoming an authorized user on someone else’s account, provided they have good credit.
- Consolidating debt or negotiating lower interest rates to simplify payments.
How Can I Build Credit from Scratch?
Start small by:
- Applying for a secured credit card or a credit builder loan.
- Enrolling in a rent-reporting service to include rent payments in your credit history.
- Consistently paying bills on time to establish a positive payment record.
- Avoiding excessive hard inquiries on your credit report while building credit.
Should I Get a Credit Builder Loan?
A credit builder loan is a great option if you’re looking to establish credit from scratch or rebuild your score. It’s a low-risk way to build a positive payment history while saving money. Additionally, these loans are accessible and specifically designed for individuals without an extensive credit history.
Does an Authorized User Build Credit?
Yes, becoming an authorized user on a credit card with a strong history can boost your credit score, provided the primary cardholder manages the account responsibly. As an authorized user, you benefit from their positive payment history and credit utilization.
Does a Debit Card Build Credit?
No, debit cards don’t build credit because they don’t involve borrowing money or repayment activity. While debit cards are helpful for managing daily expenses, they don’t contribute to your credit history or score.
