Which Accounts Build Credit?

Building good credit isn’t an exact science. It requires a combination of patience and strategy, which may sound vague, but you’re in luck: the credit bureaus provide an overview of the latter. Consider the following accounts as you carve a path in the world of credit, as the right mix can help you build a stronger credit profile.

Revolving Accounts

Revolving credit is a line of credit with balances that can carry from month to month and usually have a different payment each month, depending on your current balance. These accounts don’t close when your balance reaches zero, either.

Credit cards are the most common type of revolving account. This can include a card issued by a bank or credit union, as well as one from a retail store. These cards affect your credit in a few ways, including your payment history (paying your balance on time) and debt utilization (how much debt you have vs. your credit limit).

If you haven’t had a credit card in the past, you may have trouble getting approved for a card on your own. But there are still options, which will help you build credit so you can consider a different type of credit card in the future. These are two of those options.

Be an Authorized User: Benefitting from someone else’s credit is possible when you are an authorized user. College students often do this with a parent or guardian so they can build credit. Once a user is added to an account, they’ll receive a personal card and will be tied to that line of credit. Authorized users also benefit from the established credit history of the original user and (ideally) timely payments. Keep in mind that the authorized user can also affect the original users credit, which can be harmful if they don’t pay their bills on time or drive up their debt utilization.
Get a Secure Credit Card: Like a traditional credit card, a secured credit card appears on your reports and can help build your score. Unlike a credit card, there is no credit “line” or “limit.” However, to use the card, you must pre-load it with funds and can only charge up to that amount.

Installment Accounts

Installment accounts are debts that are paid off in equal amounts each month and typically close after they reach a zero balance. These are three examples of installment accounts.

Student Loans: Building your credit with education is possible thanks to student loans. If you are unable to pay for the education to get a degree, student loans — which come with a fixed repayment plan — can provide funding. Before you take out a student loan, make sure you understand the repayment expectations. You may also consider reading our free e-book, Student’s Guide to Credit.
Mortgages: If you are able to make the payments, homeownership could help you take your credit score to the next level. A 30-year fixed mortgage is a big commitment, but it’s also credit score gold (if you can maintain good repayment history, of course). You may want to talk with a financial planner about your options first to make sure you aren’t taking on more than your finances can handle.Putting down roots can be an effective way to grow your score.
Auto Loans: If you’re in the market for a new car, auto financing has the power to boost your credit score as you hit the road. You can even add to your auto loan benefits by finding an affordable car with good ratings and fuel economy.

Sources That Can Potentially Harm Your Score

While these accounts aren’t typically going to be reported to credit bureaus and can’t help improve your scores, they can harm your scores if something goes wrong.

Rent: The average landlord doesn’t report tenant accounts to the credit bureaus, but that doesn’t mean it isn’t possible. If you’re behind on rent, talk to your landlord about making a change for the better.
Utilities: Electricity, water and gas are necessities, but it may be a good idea to contact your service providers and ask about their reporting policies.
Phone Service: Cell providers often look at a version of your credit report before issuing a contract, but most do not report account details to the credit bureaus.

These are just some of the types of accounts that can help you build a strong credit profile. Having a variety of these accounts can benefit you, but that doesn’t mean you should take out a line of credit just to increase the types of accounts you have appearing on your history.