What to Buy to Build Credit? Key Products Explained

A credit score serves as a numerical representation of an individual’s creditworthiness, influencing access to various financial opportunities. A strong credit profile can facilitate approvals for loans, secure favorable housing arrangements, and even impact insurance premiums. Many individuals encounter difficulties in establishing or enhancing their credit standing, as a lack of credit history can create a cycle where obtaining credit becomes challenging without prior credit. This article details specific financial products and strategic approaches designed to help individuals build or improve their credit.

Core Credit-Building Products

Secured credit cards are a common tool for individuals seeking to establish or rebuild their credit history. These cards require a cash deposit, typically ranging from $200 to $2,500, which acts as collateral for the credit limit. The deposit minimizes risk for the issuer, allowing them to extend credit to those with limited or no credit history. As cardholders make timely payments, the issuer reports this positive activity to the major credit bureaus, including Equifax, Experian, and TransUnion.

When considering a secured credit card, it is beneficial to look for products with low annual fees, often under $50, or ideally no annual fee, to minimize costs while building credit. Some secured cards offer the possibility of transitioning to an unsecured card after a period of responsible use, allowing the initial deposit to be returned. Consistent, on-time payments are the primary mechanism through which these cards help build a positive payment history, which is a significant factor in credit scoring models.

Credit builder loans offer another structured approach to establishing credit by combining savings with payment history. With this type of loan, the funds, typically ranging from $300 to $1,000, are not disbursed directly to the borrower upfront. Instead, the loan amount is held in a locked savings account or certificate of deposit (CD) by the financial institution. The borrower then makes regular monthly payments, often over a period of 6 to 24 months, with interest rates generally ranging from 5% to 15%.

Each on-time payment is reported to the credit bureaus, demonstrating a consistent ability to manage debt. Once the loan is fully repaid, the funds in the savings account, along with any accrued interest, are released to the borrower. This structure allows individuals to build a positive payment history and simultaneously accumulate savings, making it a dual-purpose financial product.

Complementary Credit-Building Strategies

Becoming an authorized user on an existing credit card account can potentially benefit an individual’s credit profile without requiring a new credit application. As an authorized user, the account activity, including the primary cardholder’s payment history and credit utilization, may be reported to the authorized user’s credit reports. This can be advantageous if the primary account holder maintains a long history of on-time payments and low credit utilization.

It is important to confirm that the credit card issuer reports authorized user activity to all major credit bureaus, as some do not. The authorized user’s credit benefits are contingent upon the primary cardholder’s responsible financial behavior; any late payments or high balances on the account could negatively impact both individuals. This strategy works best within trusted relationships where the primary cardholder is financially disciplined.

Rent and utility payment reporting services offer a way to incorporate regular household expenses into credit reports, which traditionally are not included. Third-party services can collect data on on-time rent payments and sometimes utility payments (like electricity, gas, and water) and then submit this information to one or more of the major credit bureaus. These services typically involve a monthly fee, often between $5 and $10, or a one-time setup charge.

This strategy is particularly beneficial for individuals whose primary expenses are rent and utilities and who may have limited access to traditional credit products. By reporting these consistent payments, individuals can establish a payment history that contributes to their credit scores, especially with scoring models that incorporate such data. However, it is essential to verify which credit bureaus receive the reported information, as not all services report to all three.

Certain small personal loans, especially those offered by credit unions or community banks, can also contribute to a diversified credit mix and payment history. These loans are typically installment loans, meaning they have a fixed payment schedule over a set period, often between one to three years. Loan amounts can vary, usually ranging from a few hundred dollars to several thousand, and interest rates are generally competitive. While not primarily designed for credit building, consistent on-time payments on such a loan can demonstrate responsible debt management to credit bureaus.

Utilizing Credit-Building Products Effectively

Establishing a consistent record of on-time payments is the most significant factor in building a strong credit history. Credit scoring models heavily weigh payment history, making it paramount to ensure all debt obligations, including credit card bills and loan installments, are paid by their due dates. Even a single late payment can negatively impact a credit score and remain on a credit report for several years.

Credit utilization, which is the amount of credit used relative to the total available credit, also plays a substantial role in credit scoring. Maintaining low credit utilization is generally recommended, with financial guidance suggesting keeping balances below 30% of the available credit limit. For optimal credit score improvement, aiming for utilization rates under 10% on revolving accounts is often advised.

The length of credit history reflects how long accounts have been open and actively managed. Older accounts in good standing demonstrate a longer track record of responsible borrowing, which can positively influence credit scores. Therefore, it is generally beneficial to keep established accounts open, even if they are not frequently used, to preserve the average age of accounts.

A diversified credit mix, encompassing both revolving credit (like credit cards) and installment loans (like personal loans), can indicate a broader ability to manage different types of debt responsibly. While a mix can be beneficial, it is not advisable to open new accounts solely to achieve this diversity, as each new credit inquiry can temporarily lower a credit score. Opening too many new accounts in a short period can also be viewed as a higher risk by lenders.

Regularly monitoring credit reports from all three major bureaus is a practical step to ensure accuracy and track progress. Individuals are entitled to a free copy of their credit report from each bureau annually, which can be obtained through authorized channels. Reviewing these reports allows for the identification of any errors or fraudulent activity, which can be disputed to protect one’s credit standing.