Over the years of discussing credit I have realized much of my conversations have dealt with explaining to people different ways they can improve their credit score. While this is very important and a much needed conversation, especially since it is estimated that 70 million people have what is considered a subprime credit score, I have realized there is a whole other group of people that are having their dreams put on hold because of their credit. The problem with this group is not a poor score but rather not having a score at all. Since this has been a hot topic of my followers lately I wanted to explain the steps needed to generate a FICO score along with a few ways to accomplish it.
Minimal criteria needed to generate a FICO score-
1. Need to have an account on your credit report that has been open for greater than 6 months (collections do not count and the account can’t currently be in dispute)
2. Have an account that has been updated at least once in the last 6 months (one account can satisfy both criteria)
Let’s take a look at a few examples so we better understand this:
Example #1:
John is 18 and has never had any credit whatsoever. If he opens a credit card today, how long will it take him to generate a score? The correct answer is in the 7th month of the card being open. If you said 6 months, remember that rule #1 says it has to be open for GREATER than 6 months.
Example #2:
Sally had a car loan several years ago. This account was open for 4 years and has since been paid off and closed for over 2 years, but it still reports on her credit report. If she opened a new credit card today, how long will it take her to have a score? The correct answer on this one is next month (assuming the new credit card company reports to the credit bureaus every month). In case you said some other answer let me explain. The old car loan will take care of the first rule listed above; the new account will take care of the second rule so in this situation you can use both accounts to meet the criteria needed.
Best ways to get credit if you don’t have any-
1. Get a secured card– secured credit cards are the best way to establish credit of your own. The probability of getting approved is much higher than other types of credit cards. A secured card is one in which you are required to put down a deposit and then you are given a credit card that has a matching credit limit. Usually these can be obtained for $200-500 depending on the card. My advice is the lower the deposit the better. There is no reason to let someone hold more of your money than needed. You want to make sure that the secured credit card company reports to all three major credit bureaus. This is important because if they don’t, the card will not be beneficial to your credit. Also make sure you check to see if there is an annual fee or not. The interest rate is not that big of a deal as long as you use the card properly. I have written countless blogs, articles and in my book on the best balance to limit ratio to have on your credit cards. In case you have missed that you can go here to learn more about that.
2. Piggy back off someone else-Getting added as an authorized user on someone elses credit card is a great way to help establish credit. If I added my daughter to my credit card she would inherent the entire account history. So when she turns 18 she easily could have ten to fifteen years of credit. The only thing to be careful of on this is if you get added to someone’s card and they don’t make the payments, the negative history will show on your report and hurt your score. Also if the only account on your credit report is one account that you are an authorized user on many lenders will not count that as your true credit and not use the score. If you get added you will still want to get an account of your own, but this will help reduce the time it will take for you to generate a score.
The reason this topic is coming up more often is that a lot people have no idea about their credit or credit score, but they want to buy a house. First time home buyers typically wait until a few months before their lease is up and then begin looking for a house to purchase. By the time they complete a loan application there is a only a few months until their lease expires and now they find out they are getting declined. Not because they have bad credit, but because they do not have any credit or a credit score. While this can be a relatively easy problem to fix, many times the time it will take is longer than they have before their lease is up. This is just one more reason to be checking your credit reports often and address any issues before you apply for credit.