6 Accounts That Build Credit and 2 That Don’t
Your credit score depends on many different factors, but they all revolve around the accounts in your credit reports. Those are the only accounts that build credit. Any that don’t show up there are effectively not a part of your credit history.
Let’s look at some examples of accounts that build credit and two that don't to help guide your credit-building efforts.
Accounts That Build Credit
You must have a diverse credit mix to optimize your credit score, including revolving and installment accounts. Here are some examples of both, plus some insight into how they work.
1. Credit Cards
Credit cards are a type of revolving credit, which means you can use them to borrow money up to a limit, pay off your balance, and retain access to your credit line. They’re one of the best types of accounts for building credit.
That’s primarily due to the incredible variety of credit card accounts. The less competitive ones are available to almost everyone, even those new to credit. These tend to be secured cards that require a deposit equal to the available credit limit.
As you improve your credit score, you can move on to new credit cards that are harder to get. Not only are these generally unsecured, but they can also provide potentially lucrative cash-back rewards.
Another significant advantage is that traditional credit card issuers tend to report to all three major credit bureaus. That ensures your activities show in your credit reports and contribute to your credit score.
Of course, credit cards aren’t perfect. Their primary downside is that they tend to have much higher interest rates than other forms of debt. In May 2023, their average interest rate was 20.68%.
As a result, credit cards aren't suitable for long-term financing. It’s generally best to use them for day-to-day expenses and pay off your balance monthly. That lets you build credit, earn cash-back rewards, and avoid costly interest charges.
2. Authorized User Accounts
A secured credit card is one of the best accounts that build credit for people with bad scores. However, they usually require you to put down a security deposit of at least $200 to $300. It’s refundable, but that’s still more than some can afford.
An authorized user account is a good alternative if you don’t have the money for a secured card. To get one, you need to have a primary account holder add you as an authorized user to their credit card.
There’s no credit check, and it gives you the right to borrow against the card’s credit line, but you’re not legally responsible for the balances you accrue. As a result, you can generally only become an authorized user with someone who trusts you.
Another effect of becoming an authorized user is that the card’s credit history should show up in your credit reports. That can help improve your credit score, assuming the primary account holder uses it responsibly.
However, being an authorized user doesn’t build credit as effectively as having your own account. After all, you’re not responsible for the payments, so it only tells creditors so much about the way you handle your debts.
3. Credit Builder Loans
Credit builder loans are a relatively new financial product. They’re essentially a secured loan in which your proceeds serve as the collateral during the repayment term. You receive them at the end of the loan’s life, not at the beginning.
That safeguard lets providers offer credit builder loans to people with bad credit. It also means there’s generally no credit check to sign up, which is their primary advantage. However, these accounts also have some drawbacks.
Most notably, a credit builder loan isn't a credit line. If you’re looking to finance anything, it can’t help. You won’t get any money until you pay off your balance or close the account early, in which case you get the portion of the principal you paid to date.
In fact, credit builder loans really only cost you money. You don’t have to provide a deposit, but they usually have an initiation fee and relatively high interest rates. For example, Credit Strong charges 15% for its Instal product.
As a result, your monthly payments will go primarily to interest at first. If you cancel your account before you’ve had time to pay down your balance, you won’t get much of your contributions back.
4. Car Loans
Car loans are everywhere in 2023, with roughly 79% of new car owners using them to finance their vehicles. If you’re one of them, there’s some good news: car loans can be a great way to build credit.
Auto lenders typically report to at least one major credit bureau, so the installment loan should affect your creditworthiness. It’ll diversify your credit mix and help you establish a positive payment history if you pay on time.
That said, it’s not a good idea to take out an auto loan for credit-building purposes. They’re so financially burdensome that you should really only use one if you need a car but can’t afford to purchase it without financing.
Auto loans may have relatively low interest rates, but they also have high principal balances, averaging a whopping $40,851 for new vehicles in Q1 2023.
Since auto loans often last around five years, a significant amount of interest can accrue over the repayment term. For example, a $40,000 car loan with a 6% interest rate and a five-year term would cost you roughly $6,400 in interest.
5. Rental Tradelines (If Reported)
By default, only credit accounts show in your credit reports and contribute to your credit score. Bills like rent typically don’t because they’re not a form of credit, and most landlords won’t report your payment activity to the credit bureaus.
Fortunately, you can report your own monthly rent payments through a bill reporting service. That turns them into a rental tradeline and adds them to your credit report, where they can help your credit score.
In addition to your ongoing payments, our programs can report up to 24 months of previous payments. That’s one of the few ways to boost your score quickly since you usually have to build a good credit history one month at a time.
This is often well worth doing, especially if you have a thin credit file. You don’t have to take on any debt since you have to make your rent payments regardless, so it shouldn’t cause any additional financial strain.
As lenders increasingly switch to the most modern versions of the most popular credit scores, rental tradelines will only become more beneficial. VantageScore has always used alternative data sources like rent, and the most recent FICO scores now do too.
6. Utility Accounts (If Reported)
Utility accounts usually don’t show in your credit reports by default. Like your rent, you have to report them to the credit bureaus through a bill reporting service for them to contribute to your score.
Fortunately, eCredable can help with your utility accounts. In fact, our programs let you report an unlimited number of them and support up to eight account types, including power, water, gas, waste, mobile phones, cable TV, satellite TV, internet, and landlines.
With eCredable Lift and LiftLocker, you can add each of these to your TransUnion credit report as separate tradelines and boost your scores. If you’re brand new to credit, it’s also a great way to get established and generate a score for the first time.
There’s no credit check to sign up, and you can cancel at any time without any penalties, so give it a try today!
Accounts That Don’t Build Credit
To help you avoid wasting time on accounts that don’t build credit, let’s look at a couple that have no impact on your credit score.
1. Payday Loans
Payday loans are extremely short-term, high-interest loans that are virtually all downside. They generally don’t get reported to the major credit bureaus or help you build credit, but that’s the least of their drawbacks.
These accounts typically require that you pay off your balance and financing charges in one lump sum a week or two after you get your proceeds. The due date often coincides with your next payday, hence the name.
Sadly, payday loans have such outrageously high fees that most people can’t afford to repay them, especially in such a short amount of time.
Their annual percentage rates (APRs) often reach quadruple digits. They’re so expensive that many states have laws limiting or prohibiting them to protect consumers.
Payday loans are often marketed to people with no other way to borrow money. They never force you to undergo a credit check, and most don’t ask about your current debt levels either.
Unfortunately, that often means payday loan users get stuck in a cycle of debt. The lenders let you pay a fee to push the due date back, but that only keeps you trapped. As a result, it's best to avoid these accounts whenever you can.
2. Checking Accounts and Debit Cards
Checking accounts are a kind of bank account designed to hold the funds you use for your day-to-day transactions. Besides those that support overdraft features, you generally can’t use them to borrow money.
As a result, checking accounts are not credit accounts. They don’t get reported to the credit bureaus or help you build credit. And unlike rental or utility accounts, there’s really no way to change that.
Most checking accounts nowadays come with debit cards. Even though many debit cards have Visa or Mastercard logos, they aren’t actually credit cards. Debit card activity isn’t reported to the credit bureaus, so it doesn’t affect your credit.
That said, your checking account balance and activities can indirectly impact your access to credit in some circumstances. For example:
- Mortgage lenders examine your bank statements to gain insight into your finances during underwriting.
- Some credit cards check your banking history before approving you for a credit line.
Ultimately, having a checking account in good standing helps you maintain a strong financial position. It may not build credit directly, but it’s essential for keeping up with your credit account payments.
Advisory note: If you’re in danger of going negative on your checking account, be extremely careful! If you try to withdraw money from your account when it already has a negative balance, you will probably be charged a “Non Sufficient Funds” (NSF) fee.
Banks report NSF occurrences to specialty credit bureaus like Chexsystems. If you go NSF too many times, you could be barred from opening new checking accounts for awhile.
How Do I Build Credit ASAP?
Building credit fast is challenging because the most impactful scoring factor is your payment history, and you can usually only build it one month at a time. Bill reporting services like eCredable are one of the few ways to get around this problem.
When you sign up for eCredable, we can report up to 24 months of previous payments on top of your ongoing activities. By adding two years of data to your credit history virtually overnight, you can improve your score much faster than you would otherwise.
What Builds the Best Credit?
Building the best credit requires having manageable debt levels and a history of timely payments across a diverse mix of credit accounts. To accomplish that, start by opening revolving and installment accounts, but don’t take on more than you can afford.
Focus on keeping your credit utilization low and making your monthly payments on time. Without putting your finances at risk, steadily expand your mix of credit accounts over the years until you achieve the credit score you want.
Does Paying Your Bills Build Your Credit?
Paying your credit card bills will build your credit, assuming the credit card issuer reports your activities to the credit bureaus. With multiple credit cards, the process will be even faster.
However, paying bills like rent and utilities doesn’t build credit unless you use a service like eCredable. These expenses don’t get reported to the bureaus by default, but you can use our programs to share the information and work toward a good credit score.
How Can You Build Credit Starting From Scratch?
To start building credit from scratch, you should target accounts available to people without a credit history. Fortunately, there are plenty of options. After all, creditors know that everyone has to start somewhere.
Some of the best options are accounts that use collateral to protect the creditor against the risk of loss. Some examples include secured credit cards and credit builder loans, which are revolving and installment debts, respectively.
Bill reporting services like eCredable are also a good option. Since they don’t involve borrowing any more money, there’s no credit check involved, and anyone can sign up. There’s also no collateral required, so you don’t have to tie up as much money.