Building a good credit history takes patience and discipline. It won’t happen overnight, but you can take steps to speed up the process and ensure that your score doesn’t drop.
How long does it take to get a good credit score?
To build a credit history from scratch, you first need to use credit, such as opening and using a credit card or repaying a loan. It will take about six months of credit activity to establish enough history to obtain a FICO credit score, which is used in 90% of lending decisions. FICO scores range from 300 to 850, and a score is considered good if it’s over 700. Scores above 800 are considered excellent.
Do not expect an amazing number right away. While you can build sufficient credit history in less than a year to get a score, it takes years of smart credit usage to achieve a good or excellent credit score.
Note: Another type of credit score, VantageScore, can be created earlier than your FICO scores. The FICO credit score is the one to monitor in the long run. However, to ensure you’re on the right track when starting out, the VantageScore can indicate how your actions affect your new credit history.
Why does building excellent credit take time?
When you are just starting to build a credit history, time is not on your side. Lenders want to see good behavior over time, and this is a big part of what FICO scores take into account:
- Payment history (35% of the score): Have you paid on time regularly?
- Amounts owed (30% of the score): How much do you owe compared to your available credit?
- Length of credit history (15% of the score): On average, how long have your accounts been open?
- New credit (10% of the score): Have you opened many new credit accounts in a short time?
- Credit mix (10% of the score): Do you have experience managing different types of credit and loans?
Proving you pay on time and do not carry large balances on credit cards makes you a less risky and more trustworthy credit user in the eyes of lenders. These responsible behaviors carry more weight when demonstrated over time, which is why building a good credit history from scratch doesn’t happen overnight.
How to start building a good credit history
Unfortunately, the tough part of building a credit history is getting the credit you need to establish a credit history to get a score. However, there are some ways to start building a credit history and a good score.
Open a secured credit card account
Secured cards are designed for those without a credit history, or those who are rebuilding credit. You can open a secured card when you are not eligible for other cards because this type of credit card requires a deposit. The deposit serves as collateral for the issuer if you stop making payments, making it less risky for them to approve you. The deposit on the secured card can be refunded. Many issuers will upgrade you to an unsecured card based on your request after you demonstrate you can manage the card wisely. Credit card companies typically report credit card balances and payment history to credit bureaus every 30 days. Therefore, it’s easy to build a credit history using a credit card, as these factors have a significant impact on FICO credit scores. Every month you pay your secured credit card on time and do not carry a balance on it, your credit score should increase.
Be
Authorized User on Someone Else’s Card
Although you may not be approved for a standard credit card, you can become an authorized user on someone else’s account, such as your parents’ or spouse’s. Authorized users have a credit card and can use it just like the primary account holder, but they are not legally responsible for the account. The credit history of the account appears on the authorized user’s credit report as long as the card issuer reports the authorized user’s details to the credit bureaus, which can help boost your credit score. Note: If you take this route, the account must be in good standing, with a low balance and a history of on-time payments. If not, being an authorized user will not help you build a good credit score. Becoming an authorized user is a way to enhance credit score growth, not a long-term solution. The real growth of your credit score will come from building your own credit history, not relying on someone else’s credit history. Consider this option as a stepping stone to reach your next credit tool, whether it’s your own credit card or a small personal loan.
Getting a Loan to Build Credit
When you get a loan to build credit, the lender will deposit the approved amount into your savings account. You then repay this loan over time, plus interest. Unlike a traditional loan, you won’t receive the money immediately from the bank. Instead, once you fully pay off the credit-building loan, the lender will give you the amount along with any interest earned from the savings account. This process creates payment history data for your report, as long as the lender reports those details to the credit bureaus. Before obtaining a credit-building loan, make sure the lender will report your payments to the credit bureau.
Check if Non-Credit Bill Payments Count Towards Your Credit History
You might already be paying rent and utility bills. If you’re doing so on time, having a good payment history can help you build your credit report. Not all landlords report rent payments to the credit bureaus, but check if they do through a third-party service. If they don’t, there are rent reporting services such as RentTrack and PayYourRent that will process your rent payment and submit it to credit bureaus (for a fee if the landlord is not registered).
Note: Rent payments may not count towards your credit score depending on the credit bureau, but proving a good payment history on your credit report can help you reach credit limits that will be beneficial to you.
You can also enroll in a new tool offered by the credit bureau Experian that includes utility accounts, such as mobile phone and electricity bills, in your credit report and takes them into account in your score. It should be noted that this will not affect your credit files with Equifax and TransUnion, the other major credit bureaus. Therefore, if the lender does not use Experian for reporting and credit scoring, they will not see the increase.
How to Maintain a Good Credit Score
All it takes to raise your credit score is positive changes in your credit report information. In fact, it’s easier to fabricate credit than to build it, so here’s what you need to do to keep your credit in good shape once you start.
Buy
Only What You Can Afford
Credit cards are a tool, not an excuse for a shopping spree. If you open a card to start building your credit score, use it to buy small items that fit your budget and pay off the full amount owed every month. Regular use and full payment are important, as your credit utilization ratio – the amount of debt compared to available credit – is the second biggest factor affecting your credit score. If you carry a balance, pay more than the minimum due.
Pay More Than the Minimum Due if You Carry a Balance
The goal is to keep your credit utilization ratio as low as possible, so the more you pay each month, the better. You’ll eliminate your debt faster, which helps lower your credit utilization ratio and raises your score, and you’ll save money on interest.
Pay Your Bills on Time
Since payment history has the greatest impact on your credit score, don’t let payments be late.
Source: https://www.thebalancemoney.com/how-long-it-takes-to-build-good-credit-4767654
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