When you talk about credit, you need to understand two important things: your credit report and your credit score.
They’re not the same, although they are related.
Once you understand how credit reports and credit scores work, you can understand how to establish credit and build a good credit score.
If you’re curious about how long it takes to build and improve your credit, start with getting the information you need from your credit reports and your credit score -- and then explore how you can influence what each says about you.
What you Need to Know About your Credit Report
A credit report is pretty straightforward. It’s a report that details your history with credit. It contains information about the lines of credit in your name like credit card accounts and loans.
Your report also includes the age of your credit, any balances you carry, and whether there are any negative actions such as bankruptcies or judgments against you.
You can request a copy of your credit report from each of the credit bureaus, once per year for free.
You can access it more than once a year, at any time, but in most cases, you will need to pay a fee if you request more than one copy annually.
Fees for credit reports can’t exceed $12, so it’s a small amount. But still, save the money and get your free copy from AnnualCreditReport.com each year.
When you get your credit report, check it for errors.
Any information that is inaccurate -- from balance amounts to entire accounts that you didn’t open -- can negatively impact your credit score. It can also indicate evidence of fraud or identity theft.
If you find mistakes or errors, contact the credit bureau that issued the report and immediately file a dispute.
Understanding your Credit Score (and Where to Find It)
The other important thing to understand when it comes to establishing credit is your credit score.
FICO and credit reporting agencies calculate your credit score based on the information contained in your credit report.
Your credit score is a three-digit number that gives financial institutions and lenders an idea of your creditworthiness.
In other words, your credit score gives lenders an idea of how likely you are to repay the money you borrow (or how likely you are not to pay it back). The score is an indication of risk for credit issuers.
Where to Find your Credit Score
Curious about your credit score? There are a few ways to check it yourself.
If you’ve ever requested a line of credit, whether it’s a credit card or a loan, your score should have been reported to you by the lender somewhere in the origination paperwork.
And if you were denied for the credit you applied for, your score should also be shown in any denial documents.
You can also see if your credit card comes with the benefit of sharing your FICO score with you for free each month. FICO is the company that started calculating credit scores, and it’s the metric 90% of lenders use.
While the credit bureaus give their own estimates of your score, FICO is the official number to look out for right now.
Look on your credit card statements for your score, or log in to your online account. There may be a “tools” or “card benefits” section that allows you see the number.
Finally, see if the financial institution you bank with can provide your score for free.
Banks may not always provide your credit score, but many run periodic promotions that allow you to access the information without paying a fee. Simply call and ask to get more information on this option.
These methods allow you to see your exact FICO score. But if you just need an estimate and none of the options listed above work for you, sign up for a service like CreditKarma or CreditSesame.
Both these companies allow you to view your score -- and break down why it falls where it does on the credit score range. But it’s not your official FICO score. It’s a number pulled from one of the three credit bureaus.
While that score is likely in the ballpark, your actual FICO score may be higher or lower than what gets projected on CreditKarma or CreditSesame.
Use this as an estimate to give you an idea what your score is now, but be aware that it may not be the same number a lender will look at if you apply for a loan or ask for a line of credit.
A Credit History Means you Establish Credit
You can establish credit the moment you open a line of credit in your name and your account information is reported to the credit bureaus. This could be a credit card or something like a student loan, car loan, or mortgage.
It could also include accounts like your rent payments or utility bills -- but only if the collectors of your payments report your payment history to the bureaus.
Most companies and landlords don’t do this, but you can sign up for services, like RentalKharma, who will report your payment history for you to help you build credit.
And as soon as you establish credit, you start building a credit history. That history determines your credit score. But if you have no lines of credit, you won’t have a history or a credit score.
If you’re curious about how long it will take you to establish credit, the answer is as soon as you open a line of credit in your name. Pretty simple, right?
Where it gets more complicated is when you ask, “how do I establish credit in the first place?” or “how long does it take to establish good credit?”
Let’s take a look at these questions and dive into their more complex answers.
No History? Here’s How to Establish Credit and Start Building
It can feel a little like a catch-22 if you need to establish credit. You need a line of credit in order to do so, but in many cases, you need an existing credit history in order to qualify for loans and credit cards.
Thankfully, there are a few ways around this if you want to build up your own credit file and work toward a good credit score.
If you’re younger and still rely on your parents for financial support, you can work with them to establish credit in your own name.
Talk to them about being added as an authorized user to their credit card account.
They don’t have to give you your own credit card -- just the fact that you appear on their account allows you to establish credit for yourself.
You can also start building credit, because the card account activity shows up on your credit profile.
And that’s the potential downside of using this strategy.
If the cardholder doesn’t use credit wisely, misses payments, or fails to pay their bills entirely, that negative activity is reflected in your credit file even though you didn’t actually do it.
Establish Credit On your Own
If you’d prefer to build credit wholly on your own, look for credit cards specifically designed for users with no previous credit.
Ask the bank where your checking or savings accounts are for options -- the fact that you have an account with them already means they can view some of your financial activity, which may help you get approved for a basic or starter credit card.
You can also check out secured credit cards, which are great for anyone with poor or no credit.
They allow you to establish credit quickly and start building a good history. Often, you can upgrade to an unsecured card after about six months to a year of use.
Loans also provide you with a way to establish credit and create a positive payment history. Student loans are one way to start your credit history. Credit improvement loans are another.
Just be careful you don’t take out a loan you don’t need for the sole purpose of establishing credit. You’ll have to pay interest on the money you borrow, making this a costly way to build your file.
Most people are better off sticking to basic credit cards and paying off their charges on time and in full, so they don’t carry a balance. Consider a loan only if you actually have a use for one.
It Takes Time to Establish Good Credit
Establishing credit can happen as soon as you open an account. But establishing good credit could take more time.
Good credit scores are those that fall in the 700-750 range.
FICO scores can run from 300 at the worst to 850 at the absolute best. An 850 credit score is considered perfect, but very few people manage to get their score to that level.
Don’t worry about striving for perfection. As long as your credit falls into that good credit score range, you’ll qualify for most of the lines of credit you might need.
Getting your score into the excellent range (anything above 750) will also give you access to the absolute best interest rates available.
Average credit scores are those that fall in the 650 to 700 range. Below that, you’ve got poor credit (560 to 650) -- and then there’s very bad credit, which is anything below 560.
Poor and bad credit are both known to lenders as subprime. It will be hard to qualify and get approved for lines of credit if your score falls within this range.
You can quickly find yourself in the below-average categories if you open a ton of accounts all at once, rack up big balances that you don’t pay off, or regularly miss payments when they’re due.
Or, you can be smart about your credit use and make the right decisions to build a better score. With good credit behavior, you can establish good credit within two years of getting your first line of credit.
Establish Credit and Build a Positive Score, Faster
So how do you get there? It helps to understand how credit scores are calculated in the first place. These factors help determine where your score falls on the spectrum from bad to excellent.
FICO Credit Score Factors and Their Percentages
|FICO credit score factors||Percentage weight on credit score:||What it means:|
|Payment history||35%||Your track record when it comes to making (at least) the minimum payment by the due date.|
|Amounts owed||30%||How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.|
|Length of credit history||15%||The average age of your active credit lines. Longer histories tend to show responsibility with credit.|
|Credit mix||10%||The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)|
|New credit||10%||The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily. Learn more about FICO credit score|
From this, we can see that the two areas that make the biggest impact are payment history and credit utilization. So if you want to build a better score, focus on these first.
The easiest thing to do is to make all your payments on time and in full.
That’s going to be more practical if you only charge what you can afford to repay onto your credit card, and avoid taking out loans you don’t need (and are too large for your budget to handle repaying).
To help you remember to make those payments, set up automatic bill pay or create calendar reminders and alerts. This helps build and maintain a good credit score, and it helps you save money since you won’t lose cash too late fees.
Next, make sure you’re very careful with how much of your credit you actually use.
This is where the credit utilization ratio comes into play. This ratio reflects how much credit you have available to use versus how much you use in a statement period.
So if you have a $1,000 credit limit and you regularly charge $800 in purchases to your card, your credit utilization ratio is 80%.
A ratio like this will likely hold your score down. The lower your credit utilization, the better chance you have of building a good credit score.
Aim to use 30% or less of your available credit if you want to boost and maintain a good credit score.
Other factors matter when it comes to establishing and improving your credit, but these are the biggest. You should also avoid opening (or closing) lots of accounts all at once since that can drag your score down.
And it helps to maintain a variety of different kinds of credit. That means revolving credit, like credit cards, and installment credit, like student loans or a car loan.
But don’t take out loans just for the sake of having them. It costs you money and doesn’t make that much of an impact on your score to justify the cost.
Instead, focus your energy on spending and using credit wisely.
Limit what you charge and always pay off balances before they become due. You’ll avoid racking up debt and interest fees -- and your credit score will thank you.