Building credit from scratch is a little like getting a job right out of college. You need the experience to get a job, but you need a job to get experience. It’s the same with starting credit. You need to have good credit to get credit cards, but you need credit cards to build credit.
So what can you do? Fortunately, there are some ways for you to build credit even if you have none. In this post, we’ll talk about how to build credit and how to keep it.
How long does it take to build new credit?
To understand this question, we need to talk about the two main credit score models. They both have different requirements to obtain a score, and they both weigh things differently. One is VantageScore, and the other is FICO.
Building a Vantage score
VantageScore is a model that was created by the three main credit bureaus. It was formed in 2006 and is the newer of the two scoring models. People may find that their VantageScore is higher than their FICO score because of differences in the way VantageScore evaluates your history (sometimes). VantageScore is also the score you get for free when you log on to Experian or Credit Karma.
With VantageScore, you only need an identity and just one credit inquiry to have a score. It’s easy to build up a VantageScore from scratch because of this. That’s not to say you’ll have a good score; a lot more goes into maintaining a good score than just a few credit inquiries.
Building a FICO score
A FICO score takes a little more time to start. To obtain a FICO score, you need one tradeline with at least six months of payments reported. A tradeline is an extension of credit, an that can include an auto loan, credit card, personal loan, and more.
Once you’ve been paying on an account for six months, you’ll have a FICO score. What’s confusing is that you can have a VantageScore before you get a FICO score.
For instance, you could check your score online at Credit Karma and see that you have one. Then, you go to the bank to apply for a credit card, but they say you don’t have a score. That’s because they looked for your FICO score.
VantageScore is more popular for employers, landlords, and other situations requiring background checks, but the FICO model is still more popular with lenders and banks.
VantageScore vs FICO
Not only does each model have different requirements for obtaining a score, but they evaluate your history differently. Here are the factors each model looks at and how those influence your score:
|Payment history—extremely influential||Payment history—35%|
|Age and type of credit—highly influential||Amounts owed—30%|
|Percentage of credit limit used—highly influential||Length of credit history—15%|
|Total balances and debt—moderately influential||New credit—10%|
|Recent credit behavior and inquiries—less influential||Credit mix—10%|
|Available credit—less influential||—|
VantageScore uses six factors to determine your score, while FICO uses five. FICO publishes the exact percentages of each one, while VantageScore just ranks them. You can see there are differences, but they both put a lot of weight on your payment history.
Because, at the end of the day, your credit score should reflect your ability to pay back lenders.
How to build credit with a secured card
Even if you have a score with VantageScore, you still need a FICO score to apply for a car loan or mortgage. But getting one doesn’t have to be hard. A secured credit card might be one of the easiest and simplest ways to start building a payment history to get a FICO score.
Secured credit cards are often available to people with no credit. As the name suggests, the card is secured by a deposit. You can think of it as a deposit for an apartment. You’ll put in anywhere from $200 to $500 and get that money back when you close your account.
Meanwhile, that amount becomes your credit limit. Besides the deposit, the card works the same as a regular credit card. Check out CreditCardBroker to see a list of secured cards with credit requirements.
Building credit with a secured loan
The other type of tradeline available to people with no credit is a savings-secured loan. This is similar to a secured credit card. You start by depositing an amount into a savings account at a bank or credit union.
They then issue you a loan for this amount and place a hold on your savings account until you’ve paid the loan back in full. Under this arrangement, the lender can seize your deposited savings if you fail to pay back the loan.
Unsecured loans have interest rates based on the applicant’s credit score, and the lender just has to trust that they’ll pay it back. But with a secured loan, the lender knows they’ll be paid back one way or another. This means the interest rate can be lower for a secured loan.
Some nationwide banks provide secured personal loans, and you can find them at your local credit unions as well. Just make sure the lender you go with reports to each of the credit bureaus every month. After six months of payments, you’ll have a FICO score (if you didn’t already). And as you continue making payments on time, your score will rise.
Bank of America and Wells Fargo both offer secured loans for building credit. There are also some other options online. World Finance and Security Finance both offer secured personal loans designed for people wanting to build credit.
Keep your credit utilization low
Even though you can borrow up to the limit, try to keep the credit you use at 30% or below. This gives you good credit utilization, or “percentage of credit limit used,” as VantageScore puts it. If you’ve used $300 on a card with a $300 limit, you’ve maxed out your utilization and your score will suffer.
But if you have three separate cards with $300 limits each, and you’ve used $100 on each card, that $300 you’ve used is 33% of your total. That’s a lot better.
Get a store credit card
After you get a secured card, another option is to get a store credit card. The requirements for these cards can be more lenient than a regular credit card. Plus, you can only use it in that one store. Just make sure it doesn’t tempt you to max out your card.
Sometimes, stores that sell jewelry, appliances, or electronics will even offer a special financing plan for people with poor or nonexistent credit. There may even be an interest-free offer for so many months. But be sure you read the fine print with these deals.
A good idea is to pick an item that you can pay off in 6 or 12 months. Usually, these offers will have high interest rates after the introductory period, and you’ll end up paying a lot more than the item is worth if you just make the minimum payment.
How to build credit by Piggybacking
Piggybacking is another thing you can do to build credit if you don’t want to go the secured-card route. With piggybacking, you become an “authorized user” on somebody else’s account. Usually, this person is a family member or spouse. When you’re an authorized user, you have access to their credit limit.
But the only way this will help you build credit is if the lender reports their payments on your own credit report. If they don’t, it won’t have any effect on your score. Also, check to see if they’ll backdate the account for you.
This means they’ll report the previous payment history from your family member’s account to your own credit report.
Before you jump on someone else’s account as an authorized user, make sure they have a good payment history. It might be an awkward conversation to have, but you have to make sure the arrangement will help your score more than hurt it. Even just one late payment can set your score back since it’s so new.
Graduate to an unsecured credit card
If you are mindful about your financial actions and follow the advice in this article, you might be able to get a regular credit card after about a year of having a FICO score. You may also be able to transition from a secured card to an unsecured card from the same lender in a shorter time.
But take things slow. Only apply for one card at a time, and space out your applications by at least three months. Be sure to read all the fine print so you know what happens if you make a late payment or don’t pay your balance within a certain time.
Mismanaging an unsecured card is a quick way to undo all the hard work you’ve done up to this point. But there are some good options you can look at. Credit One and Capital One both offer good entry-level unsecured cards. Your first unsecured card might not have a huge credit limit, so remember to keep your use under 30%.
A garden is a great analogy for building credit. You don’t get to enjoy fresh tomatoes and basil right away, you have to tend it and be patient. In the same way, your credit score will improve as time goes on. Even if you make all the right choices at the beginning, you don’t have much history.
Making payments on a low-limit unsecured credit card will show lenders that you can handle more credit. Once you’ve had your entry-level unsecured card for a while, you can start applying to other cards like the ones offered by Discover or Chase.
Only borrow if you’re sure you can make the payments
You can see that both credit scoring methods put a lot of weight on your payment history. The fastest way to get bad credit is to miss a payment. If your payment is more than 30 days late, it may become delinquent and can seriously affect your credit score.
So even if you’ve been offered a good credit card, remember to keep the balance low and make all your payments on time.
What credit score do you start with?
If you’re wondering how to build credit, you might also wonder what score you start with as someone with no credit history. It’s hard to say exactly where your score will be. One thing is certain, though. No one starts at zero. Let’s take FICO for example.
The lowest possible score is 300, and the highest possible is 850. Now let’s say you follow all of the guidelines. You open a $300 secured card and you only use $30 in credit. And you’ve made all your payments on time for six months.
Thinking about the five factors in your FICO score, you have:
● Current payment history (no late payments)
● 10% utilization (very good)
● 6 months of history (not very long)
● No new inquiries
● 1 type of credit
Since you’re just starting out, your score won’t be perfect yet. To get above 800, you need a long history and a good mix of credit types added in that list.
But this isn’t too bad for the start. Your score might be around the average, so around 650 to 725. Now, if you come out of the gate with delinquent payments and multiple hard inquiries, you can get yourself pretty close to 300. Be careful. It’s a lot easier to go down the scale than up it.
What it’s all for
Why should you want to know how to build credit? Well, credit affects a lot in life. For many people, owning a home or apartment is a big goal. And a good credit score can make a huge difference in the required down payment and total balance paid back.
If you’re looking to get an FHA mortgage, you’ll need a bare minimum score of 500. But at that level, you’ll need a 10% down payment and will pay a higher total balance. If your score is 580 or above, you can put only 3.5% down.
To qualify for a mortgage, you don’t just need a credit score. You also need to have at least one loan and three lines of credit. If you follow the guidelines above, you’ll be on the right path.
Consider hiring a reputable credit restoration company. The Credit Agents offer free credit reviews to help you determine what needs to be done to improve your credit scores.
Call us at 1-800-786-2120 or visit our consultation page for more info.