If you have no credit history, it can be a challenge to build it, because many lenders will not want to give you credit. We will answer your question of “How long does it take to build credit?” and show you some ways to build credit from the ground up. But first let’s look at some basics you need to understand to build your credit.
Why You Need to Build Credit
Once you’re out of school and quite possibly before that, you will find very quickly that life flows much easier for those who have good credit. You are more likely to get loans for everything from houses to cars, and you are more likely to be able to get credit cards. Not only that, but your loans and credit cards will carry lower interest if you have good credit. That means life is cheaper for those with good credit. Even if you don’t plan on making any major purchases, you may need good or at least acceptable credit to rent an apartment, to have your utilities connected and to get certain jobs. Many employers today will check your credit rating before giving you a job offer.
What You Must Know about Credit Scores
After you have taken out some loans or credit cards and started paying on them, you will develop credit history very quickly. Once you have enough credit history, you will be assigned a credit score, which is a number that predicts your reliability of paying off your financial obligations. Let’s take a closer look at credit scores.
90% of financial institutions in the United States use the to FICO score to determine whether loan and credit card applicants are a good risk. This is the score you need to worry about. Lenders can get your FICO score from any of the three major credit agencies: TransUnion, Equifax and Experian. Each credit reporting agency calculates your credit score somewhat differently, so your credit score will vary a bit among the agencies. However, your FICO score will always fall between 300 to 850 and be calculated from five factors:
- Payment history:35%
- Amounts owed:30 percent%
- Length of credit history:15%
- Types of credit used:10%
- New credit:10%
The Experian website outlines how to interpret your FICO score:
- 800 +: Exceptional. A credit rating like this enables you to buy almost anything. But be aware that it usually takes many years to develop a FICO score that is this high. Length of your credit history matters.
- 740 to 799: This an excellent score that will likely enable you to get attractive interest rates.
- 670 to 739: This is in the median credit score range. Usually, this score is acceptable to lenders, but it’s best to try to get your score over 700.
- 580 to 669: This is a below average score that labels you as a subprime borrower. You may be rejected for loans or credit, and if you do get them, they are likely to carry high interest.
- 579 and below: No two ways about it. This is a bad FICO score that will affect your ability to get credit.
If you have never used credit or used it very little, there simply is not enough information to assign you a FICO score. This will work against you when the time comes that you want a loan or even to rent an apartment. If you do get the credit you seek, the lender will likely charge you high interest. Landlords and utility companies may demand a deposit if they do business with you at all.
VantageScore is a credit scoring model created in 2006 by a joint venture of the three big credit agencies, Experian, TransUnion and Equifax. It is managed by an independent company and competes with FICO. Scoring for FICO and VantageScore is different but similar. However, the overwhelming majority of lenders and creditors use FICO, so VantageScore is rarely a concern.
So Just How Long Does Credit Take to Build?
How quickly you can establish a credit score depends on the number of loans you have, how often you use credit and how often your payments are reported to the three credit bureaus. With a bit of planning, you can build a good credit history pretty quickly. It will take you six months to accumulate enough history so a FICO score can be calculated. You should be able to get a VantageScore much more quickly.
You will not be able to build a credit score approaching 850 in that time period, but you may be able to break 700. Building a score over 800 can take many years of good credit practices. Length of your credit history matters.
Some of the Best Ways to Build Credit Quickly
Let’s look at some of the ways to establish credit.
1. Get a Credit Card
One of the easiest and fastest ways of establishing credit is to get a credit card and use it responsibly. Using a credit card speeds the process of getting a FICO score, because you can use and pay on it monthly – and it’s reported monthly. Make two or three purchases on your card each month, pay off your card each month and pay on time. If you can’t pay it off completely one month, try to at least to pay more than the minimum. Yes, they track that. Keep the amount you owe below 30% of your credit limit. Missing a payment or going over your credit limit will do quite a lot of harm to your credit history. If you aren’t sure how credit cards work and need more information, here are the top five things you need to know.
If you cannot get a regular credit card, you can apply for a secured credit card which requires you to put down a security deposit. Once you have built up some credit, you can get a regular credit card. Whatever card you choose, get the lowest rate you can and check to see that the credit card lender will report your payments to all three of the big credit agencies.
2. Get an Installment Loan
There actually is a very good chance you already have an installment loan if you are reading this site, because student loans are installment loans. You could also take out a small personal loan and pay it in installments. Of course, if you have no credit history, you may need to ask someone else to cosign for the loan. Make sure the cosigner understands they could be held responsible for the entire debt if you can’t pay.
3. Benefit from Your Parents’ Good Credit
An easy way to build a credit history is to ask a cooperative parent or relative or extremely good friend to add you as an authorized user on their credit card account. You don’t even need to use the card. It’s going to be hard to find someone other than a parent or a spouse to do this though. The impact on your credit will not be as immediate as having your own card, but it’s a beginning. Before proceeding with this plan, ask the cardholder to find out from their card issuer if payments are reported to all three of the big credit agencies. If they aren’t, keep looking.
4. Consider Taking Out a Credit Builder Loan
The purpose of a secured credit builder loan is to help you build your credit or improve bad credit. You take out the loan, but the money is held in a bank account while you make payments. After you have paid off the loan, the money is released to you. Even though the main purpose of a credit-builder loan is to establish credit, it will also force you to save money, so once you get the money, you can invest it, put it into an emergency fund or use it as a down payment on a large purchase such as a car. These are not offered everywhere. If this kind of secured personal installment loan interests you, check with credit unions and small community banks.
5. Diversify Your Loans
Diversifying your debt helps you to build a high credit score. An example would be to have a credit card and an installment loan.
6. Pay Your Bills on Time, Every Time
We have already mentioned in the credit card section to pay your bills on time, but of course this applies to any kind of loan. Nothing is more important in building your credit. If you ever get into trouble with your credit card payments, follow these 6 simple steps.
7. Don’t Open Too Much Credit
Although you need to open some credit to build a credit history, don’t overdo it. The older your accounts, the better for your credit score, and new accounts lower your average account age.
8. Make Your Rent Count
If you are in college or just out of college, there’s a good chance that you rent. Unfortunately, your rent payments, though possibly your largest monthly payment, normally don’t count toward building a good credit score. Rent is only calculated in under 1% of credit reports. However, property management companies at some larger properties do report rent payments. Ask yours if it reports your rental payment activity.
If your landlord or property management company does not report your rental payments to the credit agencies, you may still be able to get your rent included. Including rental payments in credit score calculations can be a big advantage for many renters. You can’t send these to the credit bureaus yourself, but you can apply to credit reporting services who do it for you. Some report to all three agencies, and some report to only one, so check that before you sign on. Most of these services will charge you monthly, and the details of how they do it vary. For example, some may deduct the rent automatically from your bank account every month and pay it for you. You may need your landlord’s cooperation in confirming your rent to the credit bureaus.
Here are some credit reporting services you could contact about reporting your rent. This is not a recommendation. We are merely giving you services to consider on your own.
- RentTrack: reports to all three credit bureaus
- ERentPayment: Reports to all three credit bureaus
- PayLease: Reports to TransUnion and Experian
- PayYourRent: Reports to TransUnion and Experian
- ClearNow: Reports to Experian
- Rental Kharma:Reports to TransUnion
- Rent Reporters: Reports to TransUnion
It’s Easier to Ruin Your Credit than to Build It
Unfortunately, it’s much harder to build good credit than it is to destroy it. Missing a payment can have a devastating effect on your credit. Credit agencies list your late payments in categories of 30 days late, 60 days late, 90 days late, 120 days late, 150 days late or charged off. How a late payment affects your FICO score varies according to how severe it is, how recent it is and how often you pay late.
The Equifax website gives these two examples, which shows that a late payment could have a greater impact on a higher credit score than a lower score.
- Paying 30 days late could cause a point drop of 90 to 110 points for someone with a FICO score of 780 who never missed a payment.
- Paying 30 days late might only cause a 60 to 80-point drop for someone with a FICO score of 680 who was 90 days late on a credit card two years ago and 30 days late on a car loan a year ago.
Keep Your Goals in Mind
It’s worth the effort to take action to build your credit and then maintain it, always trying to increase your credit score. Check your credit score and credit reports as you try to build your credit history in the beginning, and then at least once a year. When it comes time to buy a house or complete other important financial goals, your diligence will stand you in good stead. If you’ve already built up your credit and the score isn’t as high as you would like, follow our three simple steps to get your score trending in the right direction.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.