For college students, recent college graduates, young adults, and anyone else including new US residents, looking to build a credit history fast, this article provides several useful information that will help you get started on your journey to building credit and eventually applying for unsecured credit cards.
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It can feel like an intimidating challenge to build your credit history fast from scratch, however, it can be done. The process just takes a little time and patience.
We will also discuss here steps to take if you discover an error in your credit report. Feel free to read this article on how to build credit history fast in its entirety or choose from the sections below that are of interest to you.
What is a Credit Report?
Lets start with the basics. A credit report shows your current debt, bill payment history, and other such related financial info. Financial companies, such as banks, lenders and credit card issuers report information about your credit cards, loan accounts, and credit inquiries electronically every 30 days to the three main national credit bureaus—TransUnion, Equifax, and Experian.
Every time you apply for credit, the financial institution or the credit card company pulls your credit report and credit score from one or more of these credit reporting bureaus. The lending institution will decide whether to extend you a loan — and at what interest rate — largely based on the credit history reported by those bureaus.
How Are Credit Scores Generated and Used?
There are two different credit scores.
The FICO score, which is the industry standard, and the three credit bureaus created VantageScore as an alternative. We will be talking primarily about the FICO score, but both generally use the same factors to determine your overall score. The credit score ranges between 300 and 850. About 90% of lenders use FICO scores. To generate a FICO score, you generally need to have at least one account open and reported to the bureau for at least six months.
In America, a good credit score (the closer to 850 the better) provides you with many advantages starting with getting approved for a loan or a credit card and paying a lower rate on the approved loans and mortgages to receiving pre-approved credit card and loan offers in the mail. Cable companies, utilities, and landlords usually do a credit check as part of their vetting process. If you don’t have a solid credit history, they may require a hefty security deposit from you. Sometimes, prospective employers will access your credit history when deciding whether to offer you a job or not.
When you apply for a loan or a credit card, the bank or issuer may look at just your credit score or your entire credit file. There are five major areas of information in your credit file that are used to calculate your score. A good credit score includes a healthy mix of all these factors. Each factor though weighs differently toward a score as shown below:
- Payments History (35%): Paying your bills on time every time has the biggest impact on improving your credit score.
- Credit Utilization (30%): This is the ratio of the amount you owe over your total credit limit. The lower, the better (guideline is to keep this ratio to under 30%).
- Length of Credit History (15%): This factors in both your oldest account and the average age of all of your accounts.
- New Credit Inquiries (10%): If you’ve applied for a lot of loans in the last 12 months, it could negatively affect your credit score. (Hard inquiries are requests made by institutional creditors like credit card companies and mortgage lenders and by rental applications to a landlord. If there are several numbers of Hard inquiries within the same period of time, this may negatively impact the credit score. Soft inquiries are made by the consumer himself or by an employer, and generally do not impact the credit score).
- Credit Mix (10%): Lenders like to see that you can handle various types of credit (e.g., a credit card and an auto loan).
FICO Score ranges break down as follows:
- Excellent credit: 800 – 850
- Very Good credit: 740 – 799
- Good credit: 670 – 739
- Fair credit: 580 – 669
- Poor credit: 300 – 579
A higher credit score—roughly 700 or above—can result in your getting approved for better terms and conditions.
Improving your Credit Score and Credit History
The best way to improve your credit score (and build a good credit history fast) is to focus on a few key good credit behaviors:
- Having a good payment history with no late payments
- Avoiding closing old accounts if possible
- Maintaining a strong credit utilization ratio (your amount of debt in relation to your overall credit limit)
Review your credit report at least twice a year to check for any errors and fraudulent accounts on your file. Get a free report from the three credit bureaus through the official site, AnnualCreditReport.com. You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion). You can request all three reports at once, or request them one at a time. Your free annual credit report does not include your credit score, but you can get your credit score from several sources such as Credit Karma or Credit Sesame.
Please note that negative events like bankruptcies and foreclosures stay on a credit report between 7 and 10 years, while positive events, like on-time mortgage payments, can stay on even longer. Hard inquiries remain on your credit report for just over two years, but their impact on your credit lessens over time.
The three national credit reporting agencies don’t share information with each other and not all lenders or creditors report to each. As such, your credit reports from TransUnion, Equifax, and Experian can contain different information about you. So, it’s important to monitor all three reports because you can never be sure which one will be used when you apply for a new account. You also want to make sure you review them for any errors that are damaging your scores.
To sign up for free credit scores through Credit Karma, please click on this link.
Errors on Your Credit Report
If you find errors on your credit report, write a letter disputing the error and include any supporting documentation. Then, send it to:
- The credit reporting agency (Equifax, Experian, or TransUnion)
- The Information provider that gave the inaccurate information to the credit reporting agency. These providers include banks and credit card companies.
The credit reporting agency (CRA) and the information provider are liable for correcting your credit report. This includes any inaccuracies or incomplete information. The responsibility to fix any errors falls under the Fair Credit Reporting Act.
If your written dispute does not get the error fixed, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).
How to build credit (for consumers with no or limited credit history)
Now that we have gone over the importance of having a good credit history, let’s discuss how someone with a thin file (limited or no credit history) can build credit. Keep in mind though that building your credit can take some time. if you’re starting to build your credit from scratch, it will take at least six months before you have a credit score at all. The credit scoring algorithm needs you to have at least one account active for a minimum of six months before it can generate a credit score for you.
Four Golden Rules to Establish Credit
Before we go over our recommendations, want to reinforce the four golden rules to follow when trying to establish credit.
Following these rules will help you build a good history and be the prospective customer that major issuers will be fighting over to get you to open their Cash Back or Rewards card.
- Make 100% of your payments on time, not only with credit card or loan accounts but also with other accounts, such as utility bills. Making late payments or missing payments will seriously hurt your credit score. Also, pay your monthly bill in full whenever possible to avoid interest.
- Keep your credit utilization low when using credit cards— utilization is the percentage of your credit limit you use. Credit bureaus recommend keeping your credit utilization below 30% on all cards for a healthy credit score.
- Keep credit card accounts open – even ones not being used if possible. Closing an account can hurt your credit utilization and reduce your average account age.
- Avoid applying for multiple credit accounts close together – this pertains to the issue of number of inquiries on your credit report. Multiple applications for credit within a short time period can cause a temporary drop in your score. Space applications by about six months.
7 ways to build credit history (can also be used by folks with “bad credit”)
Please see below our seven recommended strategies to establish credit:
- Apply for a student credit card - If you are a student, credit cards designed for young borrowers can be a way of building a credit history. Although most of these introductory cards have disadvantages, including low borrowing limits and higher interest rates, some of these cards offer a path to “upgrade” to a more rewarding card option. It’s important to note that you should be able to show that you have the ability to pay your monthly bills when applying for one of these cards. For a list of recommended student cards, please click here.
- Obtain a store card – Many retailers and gas stations will give you a branded credit card, even if you have no credit history. Store cards are notorious for having high APRs, so when you use store cards, make sure you pay off the entire bill at the end of the month, which means don’t buy more than you would if you were buying with cash. Many big-box retailers, such as Target, Amazon, and Walmart offer store cards that can provide loyalty benefits to frequent consumers that you would benefit from. The Target RedCard™, for example, offers an instant 5% discount at checkout, which can add up to great savings on your Target purchases.
- Apply for a secured credit card – With this type of card, your credit limit will be the amount you deposit with the bank you are applying for the secured card with. The bank that issues you the secured card will tap your account for the deposited amount if you fail to pay a bill. Though the card may not be useful for making big purchases – most secured credit cards have a limit under $500 – if you pay your bills on time and leave your security money untouched, you will begin to build your credit history. Once you have a strong credit score, you can close the secured card account and apply for an unsecured credit card. Some secured credit cards may also offer a path to “upgrade” to an unsecured card over time. For a list of recommended secured cards, please click here.
- Enroll in a Rent Reporting Service – Rent reporting services like Credit Karma will add a rental payment to your credit history. If you pay on time, it can help build your credit score. On-time payment of utility bills is a score builder. Experian recently introduced a new opt-in product called Experian Boost ™ to help build your credit history faster. Experian Boost* is completely free and can instantly raise your credit scores. Through Experian Boost consumers can allow Experian to connect to their bank accounts to identify utility and telecom payment history. After a consumer verifies the data and confirms they want it added to their Experian credit file, an updated FICO® Score will be delivered by Experian in real-time. Please note that the effect is limited only to your credit report with Experian — and any credit scores calculated on it. Since it is a free tool, highly recommend enrolling in this service. (NEW: Experian Boost now allows you list your Streaming Services (i.e. Netflix, Hulu etc.) payments to boost your credit score).
- Get a “secured” or a credit-builder loan – This is a loan used specifically to build a credit score. Generally, these loans are offered by credit unions and community banks. The lender will put the money you borrow into an account such as a Certificate of Deposit, and you’ll make payments on the money until the full amount is paid. The lender will notify the credit-rating bureaus as you make payments. When the loan is paid, the money is released to you and the credit bureaus have a basis for assigning you a credit score.
- Use a co-signer – If you have someone (such as your parents, a family member, or a close friend) with a good credit score who is willing to co-sign a loan, when you repay the borrowed money, it will build your credit score. Keep in mind that if you fail to repay the loan, it will damage both your and the co-signer’s credit ratings since the other party is personally liable if you fail to repay the loan.
- Get yourself added as an authorized user on another person’s credit card – A family member or close relative – with a good credit history who is willing to make you an authorized user on their card can help you build your credit history. By being added as an authorized user, adds that card’s payment history to your credit files, so you’ll want a primary user who has a long history of paying on time. In addition, being added as an authorized user can reduce the amount of time it takes to generate a FICO score. There is no requirement on your part on much to use that card. Ask the primary cardholder to find out whether the card issuer reports authorized user activity to the credit bureaus (typically the major card issuers do report). That activity generally is reported, but you’ll want to make sure — otherwise, your credit-building efforts may be wasted.
Remembering the 4 “golden rules” mentioned above and implementing a couple of the above steps should put you on your way to establishing a “good to great” credit history in about a year’s time.
Sources used: consumerfinance.gov, ftc.gov, fool.com, self. inc, experian.com, wallethub.com, credit.com, thebalance.com, incharge.org, and nerdwallet.com.
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To get started with Experian Boost, please see below:
(NEW: Experian Boost now allows you list your Streaming Services (i.e. Netflix, Hulu etc.) payments to boost your credit score). Experian Boost is a completely free tool. Enroll today.
*Experian Boost applies to many of the most widely used score models used by lenders. Results may vary. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
