Credit is increasingly important in today’s world. Today’s world is also very much all about getting there (wherever “there” may be) in a hurry.
But no one is born with a credit file. Everyone has to start somewhere. So if you are new to the world of credit, either because you are young or are new to the country, where do you start? And how soon can you get there?
How long does it take to build credit?
One thing to know if you are just starting out is that how long you have had credit has a direct bearing on your credit score. In the FICO score model, the longevity of your credit use is worth 15 percent of your total score.
While that may not seem like much, it is if there is not much else to build on. And your score is going to be a determining factor in what kind of interest rate and other terms (like down payments) you will qualify for when you apply for credit.
The good news is that while credit scores range from 300 to 850, no one really starts out at 300. On the flip side of that, any score under 580 is considered poor and subprime credit usually is 619 or below.
It is possible to get a loan with little or no credit history. However, be very careful of any “no credit, no problem” deals you may see. To be sure, there are lenders out there willing to take a chance on you if you have a job or some source of income. But the terms are likely to be less than ideal. In addition to high rates and other terms (like high down payments), they may not report to the credit bureaus, which will not help you in your quest to build your credit.
I hate to burst anyone’s bubble, but building good credit is a time and patience game. However, there are better avenues to start the process that make it easier to get on the right credit foot.
What’s the best way to build credit?
Retail or gas cards
Starting out with a retail store card or gas card are two of my favorite ways to begin building your credit. These cards are usually easiest to qualify for, as the issuer wants to attract and keep new customers shopping at their businesses.
Offering charging privileges is a tried and true method to build consumer loyalty. Your limits may be smaller than you’d like to start with, but that is not necessarily a bad thing. Until you learn how to manage your credit, less is definitely more.
Become an authorized user
Another great way to build credit is to be added to someone else’s credit card as an authorized user. This method is often used by parents to help their children build their own credit.
As an authorized user, you will have access to the credit card, but will not be responsible to the lender for payment. This does not mean that you won’t owe your mom or dad if you use their credit card. But that will be between you and your parents or the card owner, not you and the creditor.
Anyone can be added to someone else’s card as an authorized user. Also, be sure you use caution and check that the card in question is in good standing so that only positive information will be added to your own file. Each credit bureau treats authorized users differently. As an authorized user, TransUnion and Equifax may report negative information about the account, while Experian does not.
Secured card or passbook loan
You can also look into secured credit cards or passbook (first step) loans. Both of these methods require you to put up a deposit so that you are basically borrowing your own money. This makes it easier for a lender to take a chance on someone with little or no credit because if you default for any reason, the bank or lender will be able to take your deposit as payment. But defaulting is never a good idea, especially when you are trying to build a credit file of your own.
I like both of these products for credit building, but a passbook loan can be helpful if you already have a credit card. It is classified as an installment loan and will help the credit mix portion of your score, which is worth 10 percent. Again, that doesn’t sound like much, but it’s very helpful to those with thin credit files.
No matter the product you choose, credit card or installment loan, make sure that the lender will report to the credit bureaus, preferably all three. Also, be very sure to make your payments on time, each and every time. This is the single best way to both build on and improve your score. And it is best for your overall financial health to boot!
How to increase your credit score quickly
It can take less time to establish a VantageScore as it needs fewer data and a shorter time using credit to generate a score than FICO. The elves at VantageScore can produce a score with just a month or two of a consumer opening a credit account. FICO generally requires six months of credit history.
There are some fairly new product offerings on the market to help those with little credit as well as those who are looking to improve the score they already have.
Experian Boost looks at cellphone and other utility bills that are not typically reported to the credit bureaus and adds positive payment information to your credit report, offering an instant “boost” to your score. The relevant information comes from your bank account. This is a free service and you can opt out at any time.
UltraFICO is another free, opt-in service that looks at your positive banking data to improve your credit score. But it’s still in the pilot phase, so it may not be available to all consumers. It is also important to understand that both programs will only affect your Experian report and score, but for those with thin files the additional positive information can be quite useful.
How to go from a bad credit score to a good one
- First, get copies of all three of your credit reports from AnnualCreditReport.com and go over them carefully. If you find errors, take the necessary steps (included with your reports) to have them corrected or removed.
- In the meantime, you must pay all of your bills on time, every time. Payment history counts for 35 percent of your FICO score, making it the most important scoring factor.
- If you have credit cards, I suggest that you watch your credit utilization ratio. This is the amount of your credit limit you have used. Try to keep this percentage to 25 percent or less and know that those people with the best credit scores have utilization ratios in the single digits.
- You can look into adding to your credit mix, as referenced earlier, but only apply for new credit when you need it and when you are fairly certain you will qualify.
Most importantly, have patience. Building a good credit score takes time, but will be worth it to you in the form of lower interest rates, better odds of approval for the best credit cards and more favorable terms on future loans. A better score can even mean lower insurance premiums.
Have a credit scoring question for Steve? Drop him a line at the Ask Bankrate Experts page!