Most people need access to borrowed money at some point: to buy a car, own a home, launch a business, get a college degree, or renovate a house. The key to reaching these goals is good credit.
A three digit number — your credit score — represents your creditworthiness and determines, in large part, how much money you can borrow and at what cost. Those with good credit scores get affordable mortgages, auto and student loans, and credit cards with low interest rates. Consumers with poor credit have trouble qualifying for major loans, and are limited to credit cards with expensive terms.
Follow these moves to build — and maintain — a good credit score.
How long does it take to build a credit score?
If you don’t have a history with credit that doesn’t mean you have a credit score of 0. What it means, rather, is that the credit reporting agencies do not have enough data about you to assign you a score at all.
A credit score is calculated using information on your credit report, like payment history and utilization rate. A score can only be generated if your credit report includes sufficient reportable data.
Two main credit scoring models are used in the U.S. – FICO® and VantageScore® – and each requires a different minimum amount of data before calculating a score. For a FICO® score, you need at least one account open for six months or longer, at least one account reported to the credit bureau within the past six months (this can be the same account that satisfies requirement #1), and no report of “deceased” on the credit report.
For a VantageScore®, you need an account open for one month or longer and an account reported within the past two years. VantageScore® is thus able to score millions more consumers than FICO®.
How long does it take to build GOOD credit?
Lenders are hesitant to extend credit to those with little or no credit history. Fortunately, good credit is attainable in several ways.
Become an authorized user
Ask to become an authorized user on someone’s credit card. Be sure it’s a card that reports authorized users (some don’t), and that the primary account holder uses the card responsibly. Good or bad, the balance, limit and payment history will show up on your own credit report.
Get a secured credit card
A secured account is a great tool to build good credit when you have none. How a secured credit card works is quite simple. You’ll need to make a cash deposit, and your credit limit will usually be equal to that amount. The more you deposit, the higher your credit limit. Your charges are not deducted from your deposit, though. You’ll still have to pay the bill every month if you use the card (and you should, or you won’t establish a payment history). After six to 12 months of responsible use, you can apply for a traditional card. Once you get one, close the secured account to get your deposit back.
Get a credit builder loan
Some financial institutions offer credit builder loans. When you borrow the money, you won’t receive the cash. In some cases, the cash is released incrementally as you make payments. In other cases, you need to pay off the loan before you get the funds. Credit builder loans are typically for small amounts only (think: a few hundred dollars) that can be paid off in just a few months or a year.
How long does it take to rebuild credit?
You can build credit rather quickly. With responsible use of credit products, you might see your score start to rise within a few months. The greatest weight in a credit score is given to your credit behavior over the past two years. Remember, negative items stay on your credit report for 7 to 10 years, so if you’ve got collections, a bankruptcy or another significant derogatory item in your history, you can expect to make a full credit score recovery after that amount of time passes. Negative items hurt your score less and less over time.
What actions will raise your credit score?
Once you’ve established your credit history, these easy-to-implement strategies will push your score even higher:
Pay bills on time
The most important factor influencing your credit score is your payment history. Pay your bills on time. If you pay a bill 30 or more days late, expect your score to take a hit. Skip out on a payment completely? Your credit score will drop even further. Set up automatic payments to avoid accidentally missing a due date.
Maintain low balances
The next big factor that influences your score is the amount of money you owe on revolving accounts, relative to the total amount of credit available to you. It’s called utilization. If you owe $500 on a credit card with a $1,000 limit, your utilization is 50%. Your utilization is calculated for each account and overall. The lower your utilization, the better. Ideally, pay your bill in full each month. Even if you can’t afford to do so, it’s in your best interest to keep your balance as low as possible. Both FICO® and VantageScore® give consumers with lower utilization higher credit scores, and VantageScore® factors in the total amount of your debt, although they do not tell us how.
Here’s a trick to keeping your utilization as low as possible. Make your payments before the balances are reported. For most credit cards, that’s on or right after the statement closing date (contact your card issuers to find out the exact date) and well before the payment due date. If you have a $1,000 limit and you charge $900, your utilization is reported as 90% even if you pay off the entire balance on the due date! To ensure that it is reported as zero, make that payment early.
Keep accounts open
Even if you’re not using a credit card or a home equity line of credit, keep the account open. Part of your credit score is based on the average age of the accounts in your file. An open account stays in your file as long as it is open. A closed account in good standing will be removed after ten years. People with top credit scores have accounts in their file that are 25 years old or older.
What are you doing to maintain a strong credit score?