myFICO: How to Build Credit
Whether you're seeking a mortgage, taking out a loan or renting a new apartment, you should know how essential it is to have a good credit score. For many people, building credit starts by making timely payments on a student loan or credit card. However, to qualify for a credit card or loan in the first place, you often need to have a good credit history. This creates a challenging "chicken and the egg" scenario in which you need credit to build credit.
In this article, myFICO gives you information you need to build your credit from the ground up:
First, we’ll review what goes into your credit and FICO® Score. Then, we’ll give you a few ways to build credit from the ground up.
For more loan and credit education, visit myFICO’s credit resources: https://www.myfico.com/credit-education/
What factors affect your credit score?
The industry-standard credit score is the FICO® Score, used by 90% of top lenders to make decisions about credit approvals, terms, and interest rates. While the criteria for other credit scores vary, your FICO Scores are calculated based on five categories of information gathered entirely from your credit report. Each category represents a percentage of your FICO Score. These categories include:
- Payment history (35%) How you've paid your bills in the past
- Amounts owed (30%) How much of your available credit you're using
- Credit history length (15%) How long your credit accounts have been established
- Credit mix (10%) The types of credit accounts being used or reported, including credit cards, retail accounts, installment loans and mortgage loans
- New credit (10%) How many new accounts you've recently opened and whether you've been rate shopping for a single loan or applying for multiple new credit lines
How long does it take to build credit history?
Now that we have a better understanding of what credit is, it's important to start thinking about how to build credit history.
In order to receive a valid FICO® Score, the credit report must have:
- At least one account opened for six months or more
- At least one account that has been reported to the credit bureau within the past six months
- No indication of deceased on the credit report (Please note, if you share an account with another person, this may affect you if the other account holder is reported deceased)
The minimum scoring criteria may be satisfied by a single account or by multiple accounts on a credit file. So, if you are approved for new credit that is actively used and reported to the credit bureau, you should meet the minimum scoring criteria in six months.
Building credit from the ground up
When you first make the decision to start building credit from nothing, it can seem paradoxically difficult to get a credit card or loan without having any credit history. However, there are several options that could help you begin your credit-building journey.
Consider a credit card
Credit cards make it easy and convenient to pay for things like goods, services, bills and more. Unlike a debit card, which takes funds directly from your bank account, credit cards essentially act as an ongoing loan from the credit card issuer. When you open a new credit card account, the card issuer sets a credit limit that you can spend against. The available credit is the amount of money you have left on the card as you charge it. Then, before the due date, you simply pay back the credit card company for what you spent.
Open your first card account with a bank or credit union
If you have an existing relationship with a bank or credit union, they likely already value your business and that relationship could help qualify you for a credit card. Other credit card companies offer cards specifically designed for new credit builders.
Get started as an authorized user
Becoming an authorized user on a family member's credit card account can be a way to start building credit from nothing. This is because it can allow you to take advantage of the benefits of their good credit history, even if you never use their credit card. The process for this is relatively straightforward; the primary account holder just needs to add your name to their credit card account.
However, this method doesn't have as big of an impact on your own credit score, and it doesn't come with all of the privileges of being a primary account holder. To start building your own credit score, you'll likely need your own credit card account. For many people, their first credit card is a secured card.
Consider a secured credit card
Secured credit cards are a type of credit card that requires you to put down a security deposit to open an account. Typically, this amount then becomes your credit limit, protecting the card issuer if you're unable to make your payments. You can't, however, use this money to pay off your balance or make other purchases. Secured cards are often used by first-time card owners or those looking for credit repair, as they're typically easier to qualify for and are typically reported to the credit bureaus like an unsecured credit card.
Unsecured cards, on the other hand, are what you might think of as a traditional "credit card." It basically means that you don't have to pay a security deposit to be approved, however, qualification may be exclusive to a specific range of credit scores.
Loans, rent and service provider payments
There are other options to build a good credit history without using credit cards.
Student loans: For many people, the first loans they receive go toward college or university tuition. By paying off these installment loans in regular intervals over a predetermined period, you can start building a credit history. Student loans also get added to your credit mix, which may help your credit score.
Co-signed Loans: If you have trouble getting approved for a loan, you can ask someone close to you to co-sign. This means both parties share equal responsibility for the debt and the loan appears on both credit reports. As long as you don't miss any payments, this can be a great way to build a good credit history.
Service providers: Utilities, cable, cellular service and internet all require you to sign contracts with the understanding that you'll pay for their services each month. Many modern credit scoring systems take these payments into account when generating your credit score.
Rent payments: Sometimes, landlords will report your rental history with the credit bureau. While this is not common practice, it may be worth asking your property managers if they do this or if they can start.
How to achieve a good credit score
Achieving a higher credit score takes time, patience, and financial responsibility. While you can't get a perfect 850 overnight, you can focus on behaviors and practices that creditors look for in a borrower. This will hopefully form a habit that will help you maintain good credit in the long run. Here are a few educational tips that can help you start building credit now and in the future:
Paying your bills on time is the most important rule of thumb when it comes to generating good credit. Your payment history accounts for 35% of your total credit score, so it's best to avoid making a late payment. Some other considerations:
- Spending well below your credit limit is considered best practice as creditors typically view high spending as risky behavior.
- Read the terms and conditions of each credit card before you apply. Not only do you want to ensure it's the right card for you, but you also want to know if you'll qualify. If you apply and get denied, the inquiry may lower your credit score by a few points.
- Maintain a healthy mix of credit cards and loans to show creditors that you have experience managing different types of debt. However, remember to not open too many lines of credit in a short amount of time, as this can be seen as risky behavior.
- Finally, try not to close a credit account; only apply for credit cards you intend to keep and build a history with that account.
The importance of monitoring your credit score
Credit scores are a vital part of your overall financial wellbeing. Creditors use these scores to determine approval for new lines of credit, interest rates and fees and even utility deposits, so a bad credit score can have lasting financial impacts in many areas of your life. Knowledge of your credit score and credit history can help you better understand your current credit position before you apply for a new account. This way, you know what you need to work on before applying for a loan or card.
How to check your credit report and credit score
Under the Fair Credit Reporting Act, each of the three major credit bureaus has to provide consumers with a free credit report once a year at a minimum. However, free credit reports don't include your credit score. This means that you must go through an authorized FICO® Score retailer, like myFICO or Experian, to check your credit score.
myFICO makes it easy to understand your credit with FICO® Scores, credit reports and alerts from all 3 bureaus. myFICO is the consumer division of FICO– get your FICO Scores from the people that make the FICO Scores. For more information, visit https://www.myfico.com/
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