are all examples of revolving lines of credit.Building perfect credit takes time but comes with substantial financial payoffs. Here’s how to build responsibly and fast. 

Credit scoring is an integral part of how individuals gain access to credit, like getting a mortgage or car loan. Most people know that good credit is essential. However, the methods of building credit remain mysterious for many reasons. Most people don’t get an extensive course in credit building in school, and the credit industry keeps things under a tight lip. 

Despite these obstacles, building good, even perfect credit is within anyone’s reach. In this article, we will discuss credit building best practices and the timeline you can expect. Let’s do this!

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What’s a Good Credit Score?

Your credit score demonstrates your financial readiness to take on and repay debts. When we use “credit score,” we usually mean your FICO credit score. This is the specific scoring done at FICO, Fair Isaac Corporation, that measures your creditworthiness.

FICO uses information gathered from three credit bureaus to calculate your score. These bureaus are:

  • Experian 
  • Transunion
  • Equifax

Information isn’t always consistent across credit bureaus, so your number may fluctuate depending on which credit bureau(s) your lender uses. 

A good credit score is anything over 670, but the higher your score, the better. That’s because the more creditworthy you are, the lower the interest rate you’ll be asked to pay when borrowing. This can save you tens of thousands over your lifetime. 

Here’s the range of good credit scores:

  • 670-739: Good
  • 740-799: Very Good
  • 800-850: Exceptional

 

How Long Does it Take to Build Credit?

The truth is that building your credit score takes time. In fact, you can’t reach an exceptional credit score in less than five years. That’s because the length of your credit history makes up a significant portion of your credit score

To build your credit score from scratch, you’ll need to know as much as you can about how your credit score is calculated. Once you have a firm grasp of the basics, you’ll be able to choose the right path for you and your financial goals. 

A word of caution: credit scoring takes time and dedication to build. Along the way, you will encounter tantalizing offers for loans, credit cards, and other financial tools. Always take precautions, ask for advice from a trusted advisor, and resist impulse decisions. Your diligence is your best defense. 

Why Don’t I Have a Credit Score?

There are two main reasons you do not have a credit score. First, you’re young and are just now making the majority of financial decisions about your life. Most people under the age of 20 do not have a credit score

Second, you may be new to the United States (welcome!) and have yet to establish your credit here. Whether you’re here temporarily or on your path to citizenship, building credit will make many financial moves easier, like renting your apartment.

It’s not a bad thing to not have a credit score. All it means is that you haven’t done anything that credit reporting agencies can measure to determine your creditworthiness. Understanding what factors influence your credit score is the next step to building your credit. 

How is My Credit Score Calculated?

Your credit score is made up of several components that influence the score. Each component weights your score, with some components having more weight than others. 

Your scorecard looks like this:

Percent of Score Component Description
10% Credit Mix Credit mix refers to mixing the type of credit: Lenders and the like want to see evidence that you can successfully manage both types of credit. 

Installment line of credit is a loan paid back over time. A mortgage, student loan, and car loan are examples of installment credit. Please note that student loans do not receive the same weight as a car loan or mortgage. 

Revolving line of credit is a loan that you can charge up to a certain limit, pay, and charge again. A credit card, home equity line of credit (HELOC), and a personal line of credit are all revolving lines of credit.

10% New Credit  This refers to the number of credit inquiries you’ve had in the last two years. A credit inquiry happens when a financial institution does a “hard pull” on your credit history, that is, gets a copy of your credit history. It’s important not to try to open too many accounts at once as this can impact your score for up to two years. 

Occasionally, a “soft pull” may be done to view your creditworthiness. A soft pull is usually just a look at your credit score, not your entire credit report. This should not have any effect on your credit score. Always be sure to ask questions whenever your credit score is in question. 

On a final note, checking your own credit report does not show up as a credit inquiry. You have the right to check your credit history for free at least once a year. 

15% Length of Credit History This component is straight forward. The longer your accounts are open, the better your credit. The length of your credit history involves three factors:

  • The age of your oldest line of credit
  • The age of your newest line of credit
  • The average age of your lines of credit

Once you open a revolving line of credit, it’s usually in your best interest to keep that line open. You should also be using your line of credit continually if possible. That means charging even something small and paying it off in full at the end of the billing cycle. 

30% Amounts Owed The total amount owed to lenders influences this part of your credit score. The more you owe, the less likely you are to pay back your balances. Another factor includes how many lines of credit you have.

The amount still owed on your installment line of credit, compared to the original borrowed amount, is yet another factor influencing this part of your credit score. The further along you are in the payback process, the better your score. 

Credit utilization of your revolving lines of credit is the final factor influencing this component. Credit utilization is shown in a percentage representing the ratio of credit used compared to your credit limit. The less credit utilized the better. Once your balance exceeds 30 percent of your limit, your score will dip. It’s best to use no more than 10 percent of your available credit.

35% Payment History Payment history is the record that you have paid your loans back on time. The kicker here is that only loans, whether a revolving or installment, will report positive monthly payments automatically. So you may be paying your phone bill on time, but your phone company may not report your payments. 

But what if you miss a few monthly payments of your phone bill? Unfortunately, any late payment can damage your credit score if it’s reported.

Source: FICO.com

How to Build Your Credit Score from Scratch

Establishing your credit history is a dance. You need credit to build credit, and that puts new credit users in a bind. An easy way to overcome this obstacle is to use a secured credit card. With a secured card, you put money on the card and draw down from that balance. This is different from a regular credit card, where you charge a balance first and then pay the balance. The money you put down is referred to as the cash collateral

When you get a secured credit card, be sure your lender will report your payments to credit agencies. It’s through your payments being reported that your credit score is made. 

You may also be able to apply for a small personal loan with your bank. Some banking institutions will require that you keep a certain amount of money in a savings account or certificate of deposit (CD). The cash in your account acts as collateral for your loan. Even a loan as small as $1,500 can help you build credit fast. 

If you have the opportunity, see if you can be added as an authorized user to your parent’s or guardian’s credit card account. An authorized user is a person who has been authorized by the credit line holder to use that credit line. The most common way to do this is with a credit card. The best part is that you don’t even need to use the credit line to see the benefit. Just be sure that the credit line you’re added to has a low credit utilization ratio and a history of on-time payments.

Another way you can build credit is with the help of a cosigner. Your parent, guardian, or older family member may be willing to cosign a loan with you. That means that their credit will also be on the line if you don’t make your payments on time. Cosigning a loan is generally the easiest and cheapest way to build credit if this route is available to you. 

Beyond the First Steps

Once you’ve gotten into the game, you can build even faster. After six months of using a secured credit card, ask your credit card issuer about an unsecured account. That means you’ll be able to charge a balance and pay it off at the end of the month. 

Once you access unsecured credit, be sure to keep the utilization rate low. Thirty percent is the common recommendation, but we recommend keeping it lower than 10 percent. This is to give you added room for an emergency or accounting error. 

Credit Builder Loans

Credit builder loans are designed for building credit. You choose a loan amount, typically $300 to $1,000. Your loan amount is deposited into a savings account or certificate of deposit (CD), which acts as collateral for the loan. Then you pay the loan back over a period of time. Financial institutions that offer credit builder loans include:

  • Credit unions
  • Community banks
  • Self Financial, a financial technology company
  • Community organizations or lending circles

There are two advantages to using this type of loan. You’ll pay less in interest and you’ll receive the exact value of your loan at the end of the term. Sometimes the financial institution will even refund part of your interest. 

Car loans, popular for building new credit, come with higher interest rates and a depreciating asset. We recommend waiting for Very Good credit before getting a car loan

Expected Timeline for Excellent Credit

The truth is it’s impossible to give a universal timeline. Not only is every financial picture different, but also FICO scoring models are not entirely transparent. Without exact scoring models, you’ll need to make educated guesses as to what credit opportunities available to you are the best choice. 

We do know, according to FICO, that it takes at least six months to get an initial credit score. That is, six months from the start date of your first credit-reporting account. So long as you have opened an account that works for you and you are paying on time, you will see a positive credit score. You won’t see excellent credit yet, however. Excellent credit relies heavily on the length of your credit history, so consistency is key.

As you continue building your credit responsibly, you’ll see your numbers go up. Keep in mind that even good moves can come with a temporary setback. For example, your first credit card will give you a boost by adding to your credit history. However, you’ll also receive a hard inquiry on your credit history. While the impact is relatively low, you may see your credit score decrease temporarily. 

It’s important to know that credit reporting happens on a monthly basis, with each of your credit-reporting accounts reporting on a certain date every month. Your credit score can fluctuate week to week as different accounts report to the credit bureaus

With each report, your credit will get stronger or weaker. It may also stay the same if nothing changes in your credit history. The better you are at managing your credit, especially the components outlined above, the faster you will be able to build your credit. 

Credit Building Red Flags

Not all credit is good or useful. In fact, there are many lending products that are known to ruin credit. Loans and lines of credit that advertise “all credit approved” should give you pause. This includes products like payday loans and high-interest car loans. High-interest rates make it very difficult and expensive to pay off loan balances. While there are some reputable lenders who lend to borrowers with low credit scores, they are few and far between. 

Similarly, loan products that start with a low-interest rate that then goes up can also get you in danger. Balloon mortgages and adjustable-rate mortgages (ARM) are common examples. For most people, this type of lending is impractical. ARMs were a significant factor in the financial crisis of 2009.

The final red flag you should note is anything that resembles a bait and switch. If the person you’re working with promises you something, it better appear in the lending documentation. Always ask to see proof of the benefit, and do not bite unless the fine print is shown to you. Another bait and switch tactic includes highlighting portions of your lending documentation. This practice is almost always illegal and indicates less-than-honest business practices. 

Remember: it’s better to have no credit than get poor credit from a bad lending product. 

Frequently Asked Questions About Building Credit

How do I maintain good credit?

You maintain good credit by paying bills on time and keeping revolving credit lines low. There is no substitution for careful monitoring of your credit. Even one past due notice can lower your score. An account sent to collections can affect your credit for at least seven years. Establishing good habits early is the best way to protect your credit score. 

How can I get my credit report and monitor my credit score?

You can access a free credit report once per year at AnnualCreditReport.com. You may be able to monitor your credit score through your bank, credit card company, or other financial product. You can also monitor your credit score for free with Credit Karma. Of all free credit score monitoring companies, Credit Karma is who we trust the most.  Just be cautious when choosing offers or deals. Accessing credit can supercharge your financial habits or hinder you for years. Credit Karma is a powerful tool for monitoring credit, but only if used appropriately.

What if I miss a monthly payment?

If you miss a payment on one of your bills, contact your provider immediately. Set up a payment plan or pay the bill in full as soon as possible. Ask about how your late payment will be reported. If it hasn’t been reported, you can ask for the report to be withheld.  Just don’t abuse the power of asking. When you’re new to paying bills or have an excellent payment history, companies will want to work with you. Multiple infractions make generosity less likely. 

How many lines of credit do I need?

Generally, you want a mix of types of credit, and you don’t need much. One or two credit cards and a car loan is enough to build good credit. Your mortgage and student loans may also contribute to your credit building. Just be careful not to open too many lines of credit. Having more than three credit cards will begin to hurt your credit depending on the length of your credit history.  As a final note, always ask yourself about the purpose of your credit lines before you agree to them. Luxury perks may seem like a great deal, but the annual fee of your card may make it very expensive to own. When in doubt, go without. 

How do I monitor my credit score?

There are a few tools out there that help you monitor your credit. These include Credit Karma and some credit cards. We do not recommend paying for monitoring credit when you are first starting out. In fact, credit monitoring is generally something you don’t need to pay for.  It’s important to monitor your credit report because you’ll be able to catch if anyone else is trying to use your credit history. This is known as identity theft and it can be very damaging. However, keeping your financial information private and reviewing your credit score every few months is usually enough to keep you safe. 

Conclusion: Slow and Steady Wins the Race

You may want to hit the ground running, but building credit isn’t always that easy. 

Since the dawn of credit, predatory lending has been lurking in its dark and not-so-dark corners. Be sure to read any promissory notes and/or loan documents carefully, ask tough questions, and get any promise in writing. Your diligence is your best tool for building good credit.

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Updated June 19, 2020

J.J. Starr is a financial copywriter and enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.