Building credit is an extremely important step towards growing up as a professional. Your credit score is a kind of report card that credit card issuers, mortgage lenders, car lenders, etc. look at before deciding to give you the money you need to make great progress in life.
But how long does it take to build excellent credit? And how can you create credit if you don’t have it to begin with?
Whether you’re new to the world of credit and building it from scratch or re-entering after bankruptcy, building your credit from scratch takes time. But there are things you can do to speed up the process and steps you can take to avoid common mistakes that can slow your progress. Let’s take a look.
How long does it take to build a credit score?
If you build credit out of nothing, you can usually get a credit score within three to six months. In fact, you may find yourself with a relatively decent score throughout the year. For example, I was able to get approved for the Chase Sapphire Preferred® Card (one of the best travel credit cards on the market) just one year after accumulating credit.
What does “construction loan” actually mean?
If you have any line of credit at all, be it a credit card, personal loan, etc., you are creating credit. You strengthen your credit history by giving banks and other lenders more information about how responsibly you treat loans.
Please note that the fact that you create credit does not necessarily mean that you create good credit. If you have bad habits like late payments and credit card hoarding (we’ll talk about that in a bit), you’re not doing yourself any favors.
To build a good credit history, you must demonstrate a set of healthy financial habits that literally turn lenders into want you borrow their money.
Read more: How Credit Works: Understanding the Credit Reporting System
What is a “good” credit score?
In truth, many lenders have different definitions of what is good and what is bad. However, FICO is arguably the ultimate authority on credit ratings, and it defines ranges as follows:
- 300-579 – Very bad
- 580-669 – fair
- 670-739 – Good
- 740-799 – Very good
- 800-850 – Excellent
I recommend that you do not apply for premium (or even mid-tier) credit cards until your credit score is at least 700. This will give you a good chance of being approved.
In addition, you will also demonstrate to yourself that you can regularly take positive financial actions and therefore be responsible enough to deal with credit.
Read more: How to get a free credit report and credit score
4 ways to create credit from nothing
So what if you don’t have any credit at all? How long does it take to build credit out of nothing?
If you are first starting to build your credit history from scratch, you will have a history long enough to be assessed within three to six months.
But since you usually can’t get access to credit without having credit score first, here are a few ways to break into the world of credit:
1. Get a quick start with a co-borrower
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Personally, I remember how awful it was to get a car loan without a loan. No lender is willing to shell out $10,000 to someone they know next to nothing about.
While most loans are extremely difficult to obtain without a credit score, you can get approved for just about anything if you have a guarantor with a good credit history. This is because when you have a surety, the lender will check them loan and approve you based on that. If you default on a loan, it is the cosigner’s responsibility to pay.
Read more: What does it really mean to be a Cosigner?
2. Open a secure credit card
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Without a credit score, you will have an almost impossible time to convince a credit card issuer to let you open a card.
However, many banks offer a “secured” credit card without a credit score. In short, you agree to let the bank hold a certain amount of money as collateral. They will then give you a credit card with a credit limit equal to the amount of money you gave them.
This saves them from having to trust you. If you can’t pay off your credit card balance, the bank will simply use your own money to pay off the debt.
When you finally get a credit score and can get approved for unsecured credit cards, you can get rid of your secured card and the bank will give you your money back.
Read more: Best secured credit cards
3. Use as an authorized user
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An authorized user is someone who is added as an additional cardholder to someone’s credit card. For example, if your parents have a credit card, they can add you as an authorized user and you can use their credit limit.
One of the huge benefits of adding as an authorized user is that you will benefit from the good credit habits of the primary cardholder. The credit card will appear on your personal credit report.
This means that if you can find someone with a good credit history who is willing to add you to their credit card, you can build good credit by literally doing nothing. You don’t even have to spend money on the card – they can just add you to the account and cut the authorized user’s card when it appears.
Read more: Authorized Cardholders: Pros and Cons
4. Open a construction loan
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Credit builder loans are not typical loans as they are designed specifically to help you build credit. They are usually for fairly small amounts (think: less than $1,000) and therefore reduce the risk of getting bogged down in unmanageable debt.
You can access these loans through some banks and credit unions, or through online lending services such as Self.
With Self, the account opening process is simple. First, you choose the loan amount and payment terms. Then every month you start making payments on the loan, and when the process is completed, Self will send you a check for the amount of your principal payments.
Each month, when you make a loan payment, Self will report the action to all three credit reference agencies.
Once you completed your loan, you should have lost only a small amount of interest and fees while improving your credit score and profile. This is an extremely cool service that may be worth the nominal fees you will pay.
Read more: Is a construction loan right for you?
Check out MU30 Founder David Veliver’s tips on how to build credit from the ground up.
How to keep good credit
Building credit can be a lengthy process. It takes time and dedication – even years – to build a great credit history. It won’t happen overnight, but it will happen. As long as you improve and stick to the right habits, you will be able to raise your score.
Always make payments on time
If you don’t remember anything else, remember this: Late payments will ruin your credit score.
No matter what, don’t forget to make payments on time. Even if you can’t make monthly payments on your credit card, make at least the minimum payment. If you don’t, you’ll end up with “arrears” on your credit report, which tells creditors that you’re the type of person who defaults on your debts.
Doing this just once or twice can cause your credit score to drop. And credit history has a long memory – things like missed payments will stay in your history for seven years, and bankruptcy for up to 10. If you’re looking for a full credit rebuild, you need a much longer process. .
Read more: What happens if you stop paying with credit cards?
Keep your balance low
A big part of your credit score is “credit usage”. Banks like to see that you have a lot of loans available, but you don’t use them much. If you have a total available loan of $30,000 but have a balance of $29,000, banks will likely see it as extremely risky. This shows that you are not living beyond your means.
Read more: What is your credit utilization rate?
Don’t cancel credit cards (unless an annual fee is charged)
Another part of your credit history that you should keep in mind is your “credit history”. This is calculated based on the average length of your current active lines of credit.
For example, if your only loan is a credit card that you have used for five years, your average credit history is five years. But if you open a credit card tonight, your average credit history will be 2.5 years.
The longer your average credit history, the better your credit score.
Read more: When (if ever) should a credit card be cancelled?
Do not often apply for a new loan
This is loosely related to the previous point about credit history, but goes a little deeper.
When you apply for a new loan, the lender will perform a “hard investigation” on your credit report. Basically, they check your creditworthiness to make sure you are too risky to get a loan. Tough requests temporarily lower your credit score a bit.
If you keep applying for a new loan, you will have a lot of credit requests on your credit report. Then, when the lender examines your credit, they may conclude that these loan requests are like financial problems. Someone constantly applying for extra credit may look suspicious.
Read more: Soft traction vs. hard traction – how each affects your credit
Summary
Creating a loan can be done within a few months. However, building an excellent credit history is a process that takes years. The trick is not to get discouraged. Develop and maintain good spending and payment habits and avoid activities that will leave a black mark on your credit history.
Having a very good credit history can potentially unlock just about any loan you have your eye on, not to mention the best rates and best terms possible. Even if it takes years of effort and dedication, don’t you think it’s worth it in the end?
Featured Image: eamesBot/Shutterstock.com
