“Understanding Which Accounts Can and Can’t Build Your Credit”

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5 Accounts That Can Help You Build Credit

Establishing a strong credit history is a significant achievement that can unlock numerous financial opportunities. However, not all accounts contribute to building credit. Your credit score is based on your history of borrowing and repaying money. Understanding which accounts can help you build credit is crucial for managing your finances effectively.

Accounts That Can Help You Build Credit

Here are five types of accounts that can assist you in building your credit:

1. Credit Cards

Both secured and unsecured credit cards typically report your balance and payment activity to the three major credit bureaus: Experian, TransUnion, and Equifax. To build credit, use your card regularly and pay your bill on time each month. Keeping your credit utilization rate low by not using a large percentage of your credit limit is also beneficial. Ideally, paying your bill in full every month helps you avoid interest charges.

2. Installment Loans

Installment loans provide a lump-sum disbursement that you repay in monthly installments over a fixed term. Common types include mortgage loans, home equity loans, auto loans, student loans, and personal loans. To build credit, borrow only what you need and make timely monthly payments.

3. Lines of Credit

Lines of credit, such as personal lines of credit or home equity lines of credit, function similarly to credit cards. During the draw period, you can borrow up to your limit, repay, and borrow again. During the repayment period, it acts like an installment loan. Maintaining a balance and making timely payments can help build your credit.

4. Credit-Builder Loans

Credit-builder loans are ideal for those new to credit. Instead of receiving the loan amount upfront, the funds are placed in a savings account or certificate of deposit. You make monthly payments, and once the term is complete, you receive the funds plus any interest earned. This process helps build your credit history.

5. Authorized-User Accounts

If you can’t get approved for a credit card, consider becoming an authorized user on a family member’s card. The account’s history will be added to your credit reports, helping build your credit if the primary holder has used the account responsibly. You can make purchases, but you’re not responsible for payments.

Accounts That Don’t Help Build Credit

Some accounts may be useful for other purposes but typically don’t help build credit:

1. Payday Loans

Payday loans are expensive and don’t help build credit. Consider alternatives like bad-credit personal loans if you’re struggling financially.

2. Cash Advance Apps

Cash advance apps provide small advances on your paycheck without interest or fees but don’t report payments to credit bureaus.

3. Checking Accounts

Checking accounts are essential for money management but don’t help build credit. This includes savings accounts, money market accounts, and certificates of deposit.

4. Prepaid Debit Cards

Prepaid debit cards allow you to spend only what you load onto them, so they don’t help build credit.

5. Utility Accounts

Utility providers may check your credit when you apply, but this doesn’t affect your score. However, unpaid bills sent to collections can harm your credit. Using services like Experian Boost can help add positive payment history to your credit report.

How Long Does It Take to Build Credit?

To generate a FICO® Score, you need at least one credit account open for six months or longer. Building a solid credit history can take several years, so avoid offers for fast credit-building services, as they might be scams. Monitoring your credit and using resources like Experian Go™ can help you track your progress and learn more about building credit.

The Bottom Line

Building credit can seem daunting, but understanding which accounts help and which don’t is crucial. Take meaningful steps to establish your credit history and monitor your progress regularly.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

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