How to Build Credit – An ultimate guide
Credit history is the only history most of us will leave behind. So make it a good one. In this article, we are going to cover the basics of how to establish credit.
Money management and financial stability are two habits of any responsible person. Having a favorable credit score is a big part of that equation. A good credit score has a myriad of benefits.
Is it possible to build credit fast and how to avoid the most common mistakes? We will provide you with useful credit tips for establishing a good score and explain how it all works.
How to Improve Your Credit Score
Here we’ll cover how people can start a credit score, along with many helpful tips and simple steps on how to establish credit that will lead anyone to an optimistic and more stable financial future.
Here are the points we will cover.
- What is a credit score?
- How does credit work?
- When to start building a credit score?
- Which ways for building a credit score are there?
- How to build credit with a credit card?
- How to build credit without a credit card?
- Types of credit
- How to get a good credit score?
- Credit report basics
- How to build a credit score fast?
- Common mistakes to avoid when building
What Is a Credit Score?
A credit score is a 3-digit number used by lenders to determine how high-risk you are when it comes to borrowing. It serves as a guideline for how likely you are to be approved for credit.
It’s based on a credit report, which is a detailed summary of how past credits have been managed. In short, credit means borrowing money under the agreement that you’ll pay it back later in installments and with interest.
What Is a Credit Score Range and What Is a Credit Score Used For?
The credit score range is a number between 300–850 that depicts a consumer’s wealth. Credit scores are based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors.
Lenders use credit scores to calculate the probability that an individual will repay loans in a timely manner. This is why lenders prefer potential borrowers with a higher credit score.
How Does Credit Work?
Your credit score is something that can extremely affect your financial life and whether you can apply for credit. That is why lenders check your credit in order to determine whether someone can repay a debt.
To put it simply, the credit represents your ability to borrow money to make purchases, while making an agreement that you will return that money in a set timeframe with interest.
To better understand how credit works and how it plays a key role in any lender’s decision, we’ll describe a quick scenario. People with credit scores below 640 are generally considered as being subprime borrowers. Lenders usually charge a higher interest rate in that case because of the higher potential risks.
On the other hand, a credit score of 640 or above is usually considered as good and may cause a borrower to receive a lower interest rate. Scores above 800 are excellent. Typically, every creditor specifies their own ranges for credit scores, but below you can see the average FICO score range.
The credit score ranges are:
- Excellent 800 to 850
- Very Good 740 to 799
- Good 670 to 739
- Fair 580 to 669
- Poor 300 to 579
How Credit Scores Work
The details on your credit accounts, such as payment history and balance, can be used to calculate credit scores. Many companies use different formulas for calculating these credit score basics, but the main two are FICO and VantageScore. These two companies have scoring models ranging between 300 and 850.
They’re doing this by reviewing a credit report, which is a history of your past financial behavior. Once the lender approves you for credit it reports your account information to any of the three main credit bureaus: TransUnion, Equifax, and Experian.
And again, while there may be differences in the information that these three credit bureaus are collecting, there are five major factors in the credit score point system that are being evaluated whenever a credit score is calculated.
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
Payment history accounts for 35% of the credit score and shows whether a person pays their dues on time. The total amount owed accounts for 30% and considers the percentage of credit available to a person that is currently being used, known as credit utilization.
Length of credit history accounts for 15%, with longer credit history being less risky because there is more data to determine the overall payment history.
The type of credit used accounts for 10% of the credit score and basically shows if someone has a mix of installment credit. And finally, new credit accounts for 10%, and it factors in how many new accounts people have, or how many they have applied for.
When to Start Building a Credit Score?
It is never too early to build credit. Parents that want to have financially conscious children should consider a few options for helping their young ones get good credit.
Can I get a credit card at 17? There is an option where a person can get as an authorized user on someone else’s credit card. You must be 18 or older in order to open one in your own name. Throughout the article, we’ll cover some great credit building tips and how to build credit at 18.
Which Ways for Building a Credit Score Exist?
As we mentioned above, credit building is probably something that we need to get started on building as soon as possible. Here are some things we need to know in order to set the groundwork on how to build credit from nothing.
SSN is a unique number assigned to US citizens. With this number, the credit bureaus can gather your financial information. They can also get information about you using your name, birth date, and address.
Opening a bank account. The lender needs access to your bank statements to verify you have a source of income to make payments. This is why you need to have a checking or savings account prior to the credit card or loan application.
Proving you have an income. Banks or lenders will probably ask about your income because they are required to assess your ability to repay what you borrow.
On many credit card account applications, you‘ll need to state your annual income, which typically can be from sources like a job, savings, retirement income, or investments. This type of information is needed to help determine your credit limit and interest rate, and with this, you are practically building your credit score.
How to Build Credit With a Credit Card?
Here we have outlined the options, which are a good starting point of how to build credit with a credit card.
Applying For a Secure Credit Card
Secured credit cards are like regular credit cards, but they are supported by a deposit that helps to protect the issuer of the credit card. The deposit in a way is used to secure the amount that is borrowed.
Applying For a Credit Limit Increase
A responsible cardholder with good credit can apply for a higher limit, which can ultimately boost the credit by keeping a low utilization. This is also a major factor in credit scores.
Take Out a Credit Builder Loan
These loans help people establish and build credit. Unlike traditional bank loans, the money is not available until there was a series of payments made.
How to Build Credit Without a Credit Card
In most cases, credit cards can offer a quick way to improve credit, but how to build credit without a credit card?
Having less than ideal credit can happen. In fact, around 40 percent of Americans have a FICO credit score under 700. Here are some ways on how to build credit when you have none or start getting your score up and back on track.
- Repay a loan
- Apply for a personal or a car loan
- Apply for a secured loan
- Become an authorized user
- Make the monthly rent payments
- Make payments on time
- Timely payment of monthly utility bills
Types of Credit
There are three types of credit card accounts: installment, revolving, and open credit
Whenever we borrow a specific amount of money from a lender and agree to pay off the loan in regular payments of a fixed amount over a specified time period, that is called an installment credit. Typical examples are home mortgages, car loans, and student loans.
Revolving credit is when a lender extends credit up to a certain amount which we are free to use repeatedly if an account is open and regular payments are made on it. Prime examples of this type of credit are Credit Cards and Gas Cards.
This is a type of credit that contains elements of installment and revolving credit. With open accounts, there is typically an amount that is due in full. Examples include utility accounts—gas, electric, water. The owed amount will vary each month depending on how much was used, and the balance is expected to be paid in full.
How to Quickly Get a Good Credit Score?
“The lower a person’s score, the more likely they are to achieve a 100-point increase”
One upside to having a low score is that even minor changes can quickly cause a greater increase, even by 100 points.
Here are some pointers on how to polish your credit score, how to build credit fast, and how to quickly improve your profile.
Pay Your Bills on Time
Payment history is a big factor that affects your credit scores. Late payments remain on the credit report for up to seven years. This is why keeping a positive balance and paying bills on time is an important factor that affects your credit score.
Make Frequent Payments
Making multiple payments during the month can make a positive impact on your credit score. This is called credit utilization and is another major factor that affects your score.
Ask For a Higher Credit Limit
Asking for higher limits while your balance stays the same can instantly improve your credit.
Become an Authorized User
Consider asking to become an authorized user on a close relative or a friend who has a good credit score and record. This can significantly impact your credit history and decrease your credit utilization.
Use a Secured Credit Card
Using a secured credit card or a card that is backed by a cash deposit is another method that can help boost up your credit activity and annual reports. You can also look into credit cards that don’t require a security deposit as another option.
Keep Your Credit Cards Open
Closing a credit card can lead to a lower score. Always keep your credit cards open and try to use them occasionally so the issuer won’t have to close them. This can also improve your credit profile and overall score.
A Mix of the Above
Having a mix of all the above pointers can really help with keeping your score high and constantly getting positive annual reports every year from the three major credit bureaus.
Credit Report Basics
Credit reports hold your payment and loan history, current debt, and other financial information. You can request a credit report for free. The credit reporting agencies are Equifax, Experian, and TransUnion. You can request yours on a weekly basis or have them as an annual credit report through April 2021.
Most Common Mistakes and How to Avoid Them
Keeping a good credit score takes time. It’s crucial to develop good habits that can help us build and maintain a positive score. That is why being aware of what are the most common credit mistakes to avoid is an important part of keeping our credit score from dropping.
No matter what your credit score is, stay away from making these harmful credit mistakes:
- Not paying bills on time
- Applying for multiple credit cards at one time
- Making minimum payments
- Closing out credit cards
- Ignoring your credit reports
Good Credit Habits and Financial Tips
In this article, we covered what is a credit score and how to establish credit and how it can cost or save you a lot of money during your lifetime. Here we will quickly summarise and end with the best building credit tips that can help you get an excellent score and land you lower interest rates, which means that you’ll pay less for any line of credit you open.
Keeping a low level of debt and paying off accounts and credit on time are important steps that will help your credit score. Having that healthy mix of credit, both revolving and installment can also help. Staying on top of your payments regardless of credit type can help show lenders you are responsible for various types of credit.
How many years does it take to build credit?
Building a good credit score can go rather quickly. It can take up to 6 months to a year of a credit activity so a credit score can be built up, at which time we need to consistently pay bills on time and not use too much of the available credit card limits.
How can I build my credit at 18?
Building a credit score at a young age can be difficult, however, there are a few ways that can help you build a solid financial trust. Becoming an authorized user of a parents’ account, opening a secured credit card, or taking out a student loan and making the payments on time. All of these are smart choices on how to build good credit from a young age which will have benefits for later in life.
How do you get a 700-credit score?
Getting to and maintaining a 700 and above credit score means that you need to have as many A or B scores on any points on your credit report. It means that you need to have on-time payments, an excellent utilization between 10-30%, a low debt-to-income ratio, four or plus accounts, and less than three hard credit inquiries.
Why does my credit score say 0?
A zero-credit score means that a credit reporting agency doesn’t have enough information to give you a credit score and determine whether you’re worthy of credit. This is common for young people.
What is a perfect credit score?
It will take about six months of credit activity to build up enough history for a FICO credit score, which is used in 90% of lending decisions. FICO credit scores range from 300 to 850, and a score of over 700 is considered a good credit score. Scores over 800 are excellent
How can I raise my credit score in 30 days?
Your credit score alters every time new information is added or removed from your credit report. Taking the right actions for the duration of one month can help alter your credit score because creditors usually report updated information about lines of credit and loans on a monthly basis.
How to establish a perfect credit score? A very quick way of raising your credit score is by paying your debts, spending less, and paying bills. You can also ask for a higher spending limit. The negative information on your report can be disputed. This is another way to change the credit report.