How to Build Credit the Fastest: What to do When You Have Low or No Credit

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Sure, you can live off the grid. Maybe in a van down by the river. But for everyone who wants an apartment, car, or home of their own one day, this means you'll need credit. And while some of us were lucky enough to have parents and trusted adults help us to build credit before we went off to college, some of us (ahem, me) damaged our credit early on or have no clue how to build credit the fastest. So, I put together this long-form guide to answer any and all questions you may have about what it takes to build and maintain credit.

But before we can build credit the way we need to, we first need to understand our credit. Why does it need to be a certain number? What goes into determining my score? 

So, to get you started here is a little crash course in what a credit score actually is and how it affects your financial future.

 

What are the minimum requirements for a FICO score?

 

 

According to the myFico website, in order to receive a FICO® score there must be: 

  • At least one account opened for six months or more, and
  • At least one account that has been reported to the credit bureau within the past six months, and
  • 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).

 

This is why one of the most basic pieces of credit advice is for parents to add their kids as authorized users on their own credit line so their kids can enjoy the benefit of building credit before they actually need it at the time they go off for college. 

 

 

How do I find my current score?

 

 

Knowing your credit score is helpful for a number of reasons: it can let you know if you have good enough credit to finance a major purchase, and it can also let you know your credit health at-a-glance.

You can get your score for free on a variety of websites such as:

Many credit card companies now offer free FICO scores as a perk to cardmembers.

You can also order a hard copy from each of the three credit bureaus (Transunion®, Experian®, and Equifax®.) You can get a free hard copy mailed to you at least once each year via AnnualCreditReport.com.

 

TL:DR – Don't EVER pay for your credit score when you can get it for free. Check it FOR FREE with Credit Karma. There’s never any credit card required, and you can get a new, updated score each month. Click here to check your score for free.  

 

 

 

How does my credit score get calculated?

 

 

 

 

 


When it comes to the numbers that make up your total FICO score, remember this:


35 – 30 – 25

 

This is how much each component of your score is “weighted”. Here is the breakdown:

35% – Payments – On time payments are the largest portion of your credit score so be sure to keep your accounts in good standing.

30% – Debt – This is how much you own in relation to your income (more on that later!)

 25% – Credit Mix –  This isn’t a full number, but rather a mix of the remaining (smaller percentage) factors, such as:

 

    • 15% – Length of credit history

The longer your credit history, the higher your score. This is why it's important to keep open your oldest card and not to apply for too many new credit accounts within a given period. 

    • 10% – New lines of credit

Repeat after me: You ARE allowed to rate shop for the best interest rate when applying for new loans. This will not negatively impact your score.

Your score will be impacted if you apply and OPEN several new types of accounts in a given period. This indicates to lenders you may be in need of cash for some reason and be in financial trouble and unable to replay loans. 

    • 10% – Credit mix (types of credit)

Lenders want to see that you have a healthy “mix” of credit accounts: credit cards and loans. With loans, you can't increase the balance (the balance remains fixed and you pay it off) but with credit cards, the balance can go up and down. It comes down to “good debt” – (Mortgages and student loans) and “bad debt” like credit cards. 

 

[col0r-box] The TL:DR – In order to ace this category be sure to keep your longest credit accounts open, limit new inquiries, and make sure to have a nice ratio of good debt vs. bad debt. [/color-box]

 

Okay, so I got my credit score, but what does it mean to lenders?

 

I know it seems unfair, but your credit score is how lenders evaluate how trustworthy you are when it comes to lending you cash for things you need like student loans, cars, and home mortgages.

The higher the score, the more likely you are (in the banks' eyes) to pay back your loan. The lower your credit score, the more likely you are to default.

And it isn't just banks: potential landlords can run a credit check on you to see how likely you are to bail on your lease, pay on time, and cover all of your debts. 

 

 

 

What is a good credit score?

 

800 – 850 is considered excellent. 850 is the highest credit score you can get. 

Typically, 700 is considered a good score and is what people should shoot for when trying to improve their credit to get more competitive interest rates. Having a 700 score will get you competitive rates and it won't keep you from doing anything you want to do (financially.)

You might think, well if 850 is the highest credit score you can get, then that should be the target, right?

Well, yes. When it comes to credit, the higher the better.

But if you’ve got a lower score, shooting for the top is like trying to run an Iron Man before you’ve even done a 5k. 

 

How to find your target credit score

 

Ask yourself, “what is the goal?” If it’s to qualify for a better interest rate on a home loan, for example, you may want to raise your 600 score (which the FICO model grades as a “fair” score, to 675 (a “good” score.)

 

Then assess ways to raise your score by 75 points. Things to try might include:

  • Working with a professional credit repair agency
  • Remove any errors
  • Pay down debt
  • Automate payments so they are always on time
  • Ask for credit line increases with current card companies

It can be long, hard work to improve your credit, but the rewards are well worth the effort.

 

Consider this: At today’s interest rates, a 75 point score increase would save $43,564 in interest over the life of a mortgage.

 

How to build credit the fastest when you have no credit

 

 

If you are starting from scratch – don't worry! While it may seem overwhelming at first, it's fairly easy to build credit from zero if you have patience. 

 

Take on an auto loan

 

Auto loans are some of the easiest types of credit to obtain, so if you're looking to buy a new car and have no credit to speak of, consider financing with an auto loan instead of cash. Since an auto loan is an installment loan – meaning you pay the same amount each month over a fixed term, this is a great way to build up payment history. 

 

 

Try a secured credit card

 

Without any credit, you likely won't qualify for a credit card. But, what you can do is apply for a secured card.

A secured credit card requires a cash deposit. So, if you're approved for a $500 limit, you'll make a $500 cash deposit. If you don't pay the card balance on time, the creditor takes the cash from your deposit. Doing it this way lowers risk to the lender, and if you make all payments on time you'll eventually get that cash back all while building your credit. Win-win.

 

Credit-Builder Loan

 

 A credit-builder loan functions in the same way as a secured credit card: you pay the amount of the loan upfront, and make payments each month in order to build credit. 

The good news is that you don't need good credit to take on a credit-builder loan, and the payments are reported to all three credit bureaus. 

 

 

 

Get a Co-Signer

 

If you have a parent or trusted friend/relation willing to co-sign a loan for you, you'll likely be able to get a traditional (non-secured) loan or credit card account. It's a “short cut” to building credit because your co-signers are agreeing to pay the debts should you default. Because of the risk to co-signers, this is why it's important to have someone you trust, and who trusts in your ability to treat credit responsibly. 

 

 

 

Request a credit limit increase

 

After a period of time with good, on-time payment behavior, you can request a credit limit increase from your creditors. (This only works with credit cards, sorry, not loans!) 

A credit limit increase is an easy way to improve/build your score because when your limit goes up, if your debt remains the same,  your debt-to-income ratio automatically goes down. Whee!

 

 

 

Ask landlords and utility companies to report positive activity

 

There are (likely) many people you pay each month, on-time, but you don't get any “credit” for those payments. Think of people like your landlord, or your utility companies and cell phone bills. At least, you don't get credit for these payments automatically. 

What you can do is request they report your on-time payments to the credit bureaus, which can help build your credit and demonstrate overall credit-worthiness. 

 

 

How to increase your existing credit score

 

 

 

The truth is that your debt to income ratio is an extremely important factor in getting approved for a mortgage. This metric is used by banks and other lenders to assess your ability to repay your debt with your current income. They don’t want to lend money to someone who can’t afford to pay them back! 

 


One of the biggest indicators of credit health is how much debt you’re carrying compared to your overall income. This is widely known as your debt to income ratio.

 

How to find your debt-to-income ratio

 

You can do a quick calculation of your debt-to-income by adding up all your monthly debts (the credit card payments, student loan payments, car payments, mortgage etc.), then dividing that number by your monthly income (take-home pay BEFORE taxes).


Convert to a percentage and you have your DTI. When checking your credit, lenders typically look for a DTI of less than 35%.

 

 

 

 

What is a Good DTI Ratio?

 

 

Most lenders agree that a number below 36% of your monthly income allocated to debt repayment. But obviously the lower the better!

 

 

Ways to lower your debt to income ratio to increase your credit score

 

Create a debt payoff plan

Having a budget that works for you is the first step in lowering your debt-to-income ratio. If you haven’t been following your budget, chances are that you’re relying on credit to supplement your income. More debt = higher DTI. In addition, building a better budget can help you find money from other sources you can allocate towards repayment. Which leads us to…

 

Pay more than your minimums

Minimum payments may seem like a great option – you’re getting to keep cash in your pocket while repaying your debt. The trouble comes when you factor in interest. The more debt you have that accrues interest, the higher your overall balance will be. If your monthly payment is $25 but you’re also paying $25 in interest each month, you’ll never really make any progress. Once you’ve revamped your budget you should prioritize debt repayment first. 

 

Start a side hustle

On the other hand, increasing your income is another way to lower your debt-to-income ratio. Consider starting a side business such as freelance writing or selling crafts on Etsy. Even cleaning out your closet and listing unwanted clothes on eBay counts! Funnel the extra money that you make from your side hustle towards repaying your highest interest debt first – this is the first step in the popular debt snowball method. 

 

Ask for a raise

Waiting around for a raise can take months or even years. Make it your prerogative to ask your manager or employer about a raise when you have a glowing performance review or a record-breaking quarter. Or just if it’s been a significant amount of time since your last raise. 

By increasing your take-home pay, you’re increasing your annual income. And a higher income means all sorts of great things for your home buying dreams!

Paying attention to your DTI is a great idea for anyone trying to repay debt. By keeping your monthly payments low, you’ll be boosting your credit score while making progress on your repayment goals, both of which you’ll need to negotiate your interest rates.

 

How do I keep my credit healthy?

 

 

Avoid large purchases you can’t pay in FULL


If you want to make what I like to call a GLP – gigantic life purchase – in 2019 (think house, car, business etc.), then you’ll want to keep large purchases to a minimum from now until then. For example, don’t finance a washer-dryer set when you’re looking to finance a car in the next few months. Don’t buy a brand new car when you’re about to start shopping for a home loan.

With that said, of course, there are emergencies that can’t be helped. But if you can keep GLPs to a minimum during this time, please do.

 

Build your emergency fund


Here’s why having extra funds is more important than ever: in 2019, a new FICO score with debut and this time, the new “UltraFICO” score will factor in how much people keep in their checking and savings accounts. It’s a new score designed to help those with lower scores increase their scores enough to qualify for lending.

It can also be a good thing for consumers because it is now the one factor in a credit score you can directly control.

For example, if you want to buy a home next year but are worried your credit might be too low, start saving. Start saving in addition to any home down payment fund you might have, as the more money you keep on hand, the higher your score can be when “UltraFico” gets rolled out in early 2019.

For those who may have bad credit with several bad marks, A credit repair firm like Lexington Law can help with filing disputes or challenging specific items on your credit report. They’ve helped over 100,000 clients remove inaccurate and unverifiable items from credit reports such as late payments, collections, charge-offs, and more.

 

 

Make On-Time Payments


Here’s why having extra funds is more important than ever: in 2019, a new FICO score with debut and this time, the new “UltraFICO” score will factor in how much people keep in their checking and savings accounts. It’s a new score designed to help those with lower scores increase their scores enough to qualify for lending.

It can also be a good thing for consumers because it is now the one factor in a credit score you can directly control.

For example, if you want to buy a home next year but are worried your credit might be too low, start saving. Start saving in addition to any home down payment fund you might have, as the more money you keep on hand, the higher your score can be when “UltraFico” gets rolled out in early 2019.

For those who may have bad credit with several bad marks, Lexington Law can help with filing disputes or challenging specific items on your credit report. They’ve helped over 100,000 clients remove inaccurate and unverifiable items from credit reports such as late payments, collections, charge-offs, and more. Learn more about Lexington Law here.

 

 

What happens if I miss a payment?

 

 

 

Okay, so if you miss a payment on a credit card or loan account, even by a day, they'll usually assess some type of late payment fee.

A late payment gets reported on your credit report when you are 30+ days late to pay your bill. So, a few days after (hey, you go on vacation or you forget…it happens) isn't a big deal, except you're out the $25-$35 late fee. 30+ days late could have serious impacts on your credit score.

CreditKarma.com reports that just one late payment reported to your score can drastically lower your score.  It's hard to give an exact number of how much your score will fall per missed payment as it depends on how many accounts you have, your overall on-time payment percentage and other factors.

But remember – on-time payments make up the largest portion, so this is an area you especially want to get right. 

 

 

What do I do if I've damaged my credit?

 

 

 

If you're building credit from scratch, you won't need help repairing your credit because, well, you don't have any. But if you're looking to build credit because you've damaged yours in some way, I've got a handful of ways to DIY-credit repair and some signs of when you should call in the professionals. 

 

How to repair your credit on your own

 

Repairing credit on your own comes down to four main steps:

 

  1. paying your bills on time (come on guys! We've covered this at length by now)
  2. Keeping your DTI within a healthy range
  3. Removing any negative information
  4. Time

 

How do I remove negative information?

 

To dispute negative information, have a copy of your free credit report handy. Look at the negative information. Who is with? How did you get it?

 

If you feel the information is in error, there are two ways to have it removed:

 

  1. Directly with the credit bureau (Equifax, Transunion, Experian) – and remember, information on one may not be reflected across all three reports, which is why it's important to request the full report. (Remember – you get a free one each year!)
  2. You can dispute the info with the business that reported it – For example, if you have an unpaid bill with AT&T, you can go to them and ask for it to be removed. 

 

Then you can file a dispute for any negative information online (seriously, it's 2019) or if you're old fashioned and like your penmanship…you can do it via mail. 

 

From The Balance: 

” To dispute via mail, write a letter describing the credit report and submit copies of any proof you have. The credit bureau investigates your dispute with the business that provided the information and removes the entry if they find that is indeed an error.”

 

If the information is accurate, credit bureaus won't remove it, so you may have to try a few other methods:

 

  • A “pay for delete” offer – Where you pay the remaining balance in full in exchange for the business removing the negative info. 
  • A “Goodwill deletion” – A letter explaining details as to why you were late to pay and why it won't happen again.

 

If a lot of negative information exists on your report, or if there is a lot to contest, it's easy to see why many individuals opt for professional credit repair as a way to outsource the legwork of writing and querying credit bureaus and businesses. 

 

Credit score lower than you'd like? Consider working with a professional company to increase your score and remove negative items from your report. Click here to schedule a free, 15-minute consultation with Lexington Law Firm and see how much you could save by improving your score before buying a home.

 

 

How do I know if I need professional credit repair help?

 

Having a large number of student loans left to repay

 

Large loan balances likely means your debt-to-income ratio is still too high, which is why you can’t seem to raise your credit score no matter how perfect you are with your credit card payments.

 

A credit repair agency helps negotiate payments with lenders and come up with a customized debt and credit plan that works for your lifestyle. With the help of a professional, you’ll not only improve your credit in the ways that matter most for your situation, but pay off debt at the same time.

 

Still paying for a significant amount of debt from your post-college years

 

As someone who has literally built a business out of writing about the money mistakes I made in my twenties, I can completely relate to having bad financial behavior follow you around throughout the decades.

 

You may be older (and wiser) and know better now, but can you ever really change the past? Possibly. Here’s what you’d seek credit repair help for:

 

  • Opening and closing cards
  • Too many credit inquiries
  • High revolving balances
  • Not having a good mix of credit
  • Late payments and delinquencies

 

A credit repair agency will work with both creditors and the bureaus to limit your own stress and effort involved, and make sure your debts are squared away and in good standing (if applicable.)

 

Past bills sent to collections

 

Let’s say you got your financial act together and are on pretty solid footing. Even if you’ve had past bills sent to collections, you might need the help of credit repair professionals in getting the mark removed from your credit report.

Remember: removing negative items is one of the fastest ways to boost your score.

 

Debt from the military

 

For military members, managing debt and credit is a bit more complex than it is for civilians.

If you are in debt trouble from a time when you were on active duty, you are entitled to benefits under the Service Members Civil Relief Act.

 

The benefits and protections under this law are numerous, but it may be better to work with a credit professional well versed in this law to ensure you get the maximum you’re entitled to. The credit repair organization will work on your behalf to lower interest rates, get interest rates refunds (in some cases) and remove any derogatory remarks from your credit. Legally, those shouldn’t exist, but mistakes can happen.

 

Even if you’re non-active duty, it’s important for servicemen and women to keep their credit in good condition as it could affect security clearances and keep military members from being deployed and could result in a discharge.

 

 

You want to buy a car, home or business in the next twelve months and your credit is lower than you’d like

 

 

Credit repair works by challenging any negative information on your credit report on your behalf. If the bureau can’t substantiate the negative mark, they’re required (by law) to remove it.

 

Once removed, your score will rebound. 

 

You can improve your credit on your own, but it can take years to make all the strategic moves necessary to see a score increase. Which is fine…and cheaper, but difficult if you’d like to make a large purchase in the near future.

 

The TL:DR – When working with credit repair professionals, like Lexington Law Firm, past members have seen an average of 40 points in 4 months.

 

The Final TL: DR

 

Obviously, since a lot of your credit is weighted on length of credit history, the sooner you get started the better. What's that saying? There's no better time than today?

But don't get down on yourself if you've waited to build credit or feel you're “too old” to start, because that just isn't true. Using the steps above, it's easy to get started right away. You just need to have patience. 

 

This post is sponsored by Lexington Law. All opinions and content are my own. Thank you for supporting the brands that make this blog possible.

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