What is credit? How to establish credit fast

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Credit is so important, but few people really understand how it works. A good or better credit score can save you hundreds of thousands of dollars over the average person’s lifetime, give you access to cash to buy a home, get an auto loan for a car, finance a business, and get out of debt faster and cheaper. Studies even find that a low credit score reduces your romantic prospects. Facts.

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Thankfully, I have always had a high credit score and a clean credit report. This has allowed me the following benefits:

  • Bought my ex out of our apartment when we divorced — at a very competitive interest rate
  • Bought a new car when my old one died
  • Earned a $0 credit card to float some business expenses when I was starting my media company
  • Snagged some successful boyfriends who cared that I had my financial act together

There are all kinds of reasons your credit score may be low — or even average, though of course you want it to be as high as possible. A divorce, business that went south, natural disaster, prolonged illness or unemployment, credit theft or any other number of.

What is credit?

But … what exactly is credit? Credit is simply your ability to borrow money. This could be from a bank, credit card company, student loan financer, car loan underwriter — or even a friend or family member. The terms of the credit are affected by the likelihood of your ability to repay any loan or debt. These include:

  • Your history of paying bills on time
  • Credit: debt ratio, or the amount of debt relative to the amount of credit you have — 30% or less is ideal. In other words, if a credit card gives you a $10,000 limit, try to keep your credit balance at $3,000 or lower.
  • Length of credit history. Many people, especially younger adults, have a low credit score simply because they do not have a recent history of borrowing and repaying money.
  • Type of credit. A mix of installment (like a car or home loan) and revolving credit (like a credit card) is ideal, though type of credit accounts for just 10% of your credit score).
  • Number of credit inquiries. An inquiry includes when you apply for a loan or credit card, and any interested lender sends a message to the credit bureaus inquiring about your credit history.

What is considered to be good credit?

Credit scores range between 300 and 850.

The higher the score, the more likely a lender will give you a loan, at a low interest rate, because you have proven to be likely to pay back the loan according to the terms.

A credit score of 700 or higher is considered “good.”

A score of 800 or higher is considered “excellent.”

Most credit scores fall between 600 and 750.

Why is having bad credit a big deal?

FICO is the most widely used credit score, and it ranges from 300 to 850.

Generally, a score below 550 is bad news, and anything above 750 is golden.

If you’re in the middle, you’ve got some leeway, but the higher the better.   

Crummy credit can keep you from getting the things you need to get ahead — or even just caught up — in life.

In some cases, employers run credit checks on potential hires.

If you need to get a mortgage to buy a home (or refinance your mortgage to keep your house), get a car loan, get a student loan, a good rate on insurance, or a line of business credit, you may find that you need a boost in your credit score to get what you need.

The higher your score, the better the chance of reaching your goal, and the lower the interest rate, which means the less you will have to pay back on the debt. (Read: 3 tips to get approved for a loan from Lexington Law)

Can you imagine nailing an interview at your dream job only to lose out in the end because your credit isn’t good enough?

In extreme cases, it can affect where you lie your head at night. Many landlords run credit checks.

There are people in nearly every town in America paying hundreds of dollars a week to live in hotel rooms because their credit isn’t good enough to get even the most basic apartment.

That’s terrible, and it’s a destructive cycle because when you’re paying that much just to have a bed, it’s even harder to climb out of a hole and start repairing your financial situation.

What is considered to be bad credit?

A “low” credit score is any score below 620.

Poor Credit is 600-649.

Bad Credit is below 600.

Poor credit can be owed to:

  • No recent history of using credit
  • Late bill payments
  • Maxing out credit limits

How to establish credit

There are many reasons why you may need to build your credit fast: You want to buy a home or car, need to rent an apartment, qualify for a loan for school, business or a home renovation. Thankfully, building credit, or fixing a bad credit score, is easy — but it takes time, patience and diligence.

How to build credit fast

One of the most common questions is “How long does it take to build credit?”

If you do not have any recent credit history, you can build a good credit history with the credit rating company FICO, within six months. The newer competitor VantageScore will generate a credit score within a few months.

Here is how to build a credit score from scratch:

1. Apply for a secured credit card. This is a credit card that’s limit is based by a cash deposit that you put down. So, if you put $500 down on a secured credit card, your limit is $500. Make regular charges (like your phone or electric bill), set up automatic payments on time, and watch your credit score increase.

Before you sign for a secured card, make sure:

*It has a low annual fee

*It reports to the three credit bureaus: Equifax, Experian and TransUnion.

Once your score reaches 700 or more, move on to a regular, unsecured credit card — one with no annual fee, a good points system, and other perks that you can now enjoy thanks to a solid credit score!

2. Get a co-signer with good credit. If your parents, partner or friend has a long and happy credit history, ask if they will co-sign for a credit card. Their good credit will affect your credit.

3. Become an authorized user on the credit card of someone with good credit.

4. Use a credit builder loan program. I’m a fan of Self Lender and similar programs, which have the benefit of both helping you build a savings account, while also building your credit. The program gives you a loan, holds the money, sets up automatic payments, and at the end of the term you have a cash savings and (if you made all the payments on time), a credit score boost.

5. Be a good credit user:

The best way to boost your credit score now, and in the long-term is to be a good steward of your credit:

  • Pay your bills on time, and in full.
  • Keep the total borrowed at 30% or less of the credit limit.
  • Keep an eye on your credit score and report, and address any errors on your credit report.
  • Don’t close accounts. Even if you pay off your credit card, keep the account open. A long credit history is a positive.
  • Keep number of credit accounts to a minimum.

How to fix bad credit

Your credit score may be low for all kinds of reasons — some may not even be your fault. The good news is that credit is never ruined forever. Here is how to fix your bad credit, and repair a low credit score:

1. Review your credit history at Equifax, Experian or TransUnion.

2. Dispute any errors, late payments, lines of credit that are not yours, duplicate accounts, and accounts that should have aged off the report. You may choose to hire a credit repair company to do this for you. (Read: The Credit People Review)

3. Increase your credit limits. One of the most important factors of your credit score is credit utilization — or the percentage of credit that is available to you that you actually use. In other words: Don’t max out your credit cards. Since your credit utilization is calculated across all your lines of credit, by increasing the difference between your credit balance, and the credit limit, you will quickly improve your score. You can improve your credit utilization by:

  • Call your credit card company and ask for your limit be increased
  • Pay down any debt
  • Open a new card. Even if you don’t use the new card, that new limit improves your credit utilization score — and therefore your score

4. Ask for a co-signer with a good credit history — or ask that friend or loved one to make you an authorized user on their card.

5. Keep paying those bills on time! (but you knew that)

How to build business credit

If you have your own business, you may need a business credit card, business loan, or to sign a lease, or get a car loan under the name of your business.

While one may influence the other, your business and personal credit scores are considered separately.

  • Incorporate and establish your business. I incorporated into an S Corp through LegalZoom. That will provide you with an EIN.
  • Establish your business with its own P.O. box or other mailing address, phone number, business checking account, and register with Dun and Bradstreet.
  • Check your business credit reports for errors. Scan the report for the correct address, ownership information, debts, liens, bankruptcies, and sales figures.
  • Establish trade lines. These are lines of credit with your vendors. Pay on time, and make sure these lines are reported to the credit bureaus.
  • Pay on time. Every time. Even early!
  • Build your personal credit history and score.

How to get a credit report

Thankfully, there are federal laws that protect consumers, and ensure you have access to your credit report, credit score, and all information potential lenders can see about your borrowing history. Legally, you also have the right to dispute all errors on your report. In other words: when it comes to credit, the law is on your side.

To start to understand your own credit history and score, start by pulling a free credit history, which will also have a credit score. I go into detail about what a credit score is and how the report works below.

The three major credit reporting agencies, Experian, TransUnion, and Equifax, all provide credit scores and reports, but in slightly different ways:

Equifax offers several credit protection and monitoring programs. For a fee of $14.88 per month, you can get both your FICO and VantageScore credit scores and credit reports.

Experian uses the FICO 8 credit score system. For a fee starting at $24.99 per month, you can get the Credit Tracker subscription, which allows you to monitor your credit score, and get your credit report. Increase your FICO® Score* instantly. Sign up for Experian Boost (free) >>

TransUnion will also provide your credit score and report for a monthly fee, but also provides its free TrueIdentity credit lock program, which lets you monitor your credit activity and lock your account.

How to get a free credit report

Today, most banks, credit unions and even credit cards provide a free credit score for free, automatically. You can also get a free credit report, with all the details of your credit history, once per 12 months, for 100% free, from annualcreditreport.com, which is authorized by federal law. People often ask if it is safe to use annualcreditreport.com, since you must share your social security number and other important identifying information. The answer is: Yes, it is safe to use this service, which is tightly monitored by the three reporting bureaus that support the site with their credit scores and reports.

How to read a credit report

Now that you have your credit report, what does it all mean?

A credit report typically has six parts:

1. Personal history. Check to make sure your name, social security number, birth date, address and other information is correct.

2. Employment history. This helps confirm your identity. Make sure that it is accurate and up-to-date.

3. Consumer statements. This is a record of when you have challenged or disputed charges and other credit information in the past.

4. Account information. This is where the juice is. Check and double-check to make sure this information is correct, rightfully attributed to you (and not someone with the same name), and up-to-date. Account information includes:

  • Open accounts
  • Closed accounts
  • Dates accounts were opened or closed
  • Payment history
  • Credit utilization
  • Current account balance
  • Loan payment status

5. Public records include bankruptcies, foreclosures, tax liens and civil judgments.

6. Hard inquiries, or requests by a bank or another financial institution about your credit history. If you see credit inquiries that you believe were not intended for you, dispute this.

How to freeze your credit report

If you are a victim of identity theft, if your mail or financial passwords have been compromise, or perhaps you are going through a breakup with someone who you think may take advantage of having this information, consider freezing your credit report.

When you freeze a credit report, creditors — or hackers — can’t access your credit score or report unless you give them a PIN. However,  current lenders can. It is now free to freeze your credit, and lift a freeze. You have to contact each of the three reporting agencies individually:

How long does it take to improve a credit score?

If you are working on your credit score, one of the main questions you likely have is How long does this shiz take?! After all, you’re likely itching to buy a home, car, refinance debt or make other big, positive changes in your life.

The bad news: This is not a quick fix.

  • Errors like fraudulent accounts and duplicate accounts can be removed relatively quickly and increase your score within a couple months
  • Improving your credit utilization, and being added as an authorized user on the credit cards of someone with a high credit score — or having them sign on to your card as a co-signer — can also improve your score quickly.
  • Hard credit inquiries stay on your credit history for two years.
  • Legitimate late payments and collection accounts remain for seven years.
  • A bankruptcy remains on your credit history for 10 years.

The good news: This does not mean that these errors will keep your score low forever. It simply means that past bad credit habits will affect your score for a while — but it will not destroy your life.

Use Credit Sesame to get a free credit score >>

Try The Credit People to clean up your credit report >>

Increase your FICO® Score* instantly. Sign up for Experian Boost (free) >>

About Emma Johnson

Emma Johnson is a veteran money journalist, noted blogger, bestselling author and an host of the award-winning podcast, Like a Mother with Emma Johnson. A former Associated Press Financial Wire reporter and MSN Money columnist, Emma has written for the New York Times, Wall Street Journal, Forbes, Glamour, Oprah.com, U.S. News, Parenting, USA Today and others. Her #1 bestseller, The Kickass Single Mom (Penguin), was named to the New York Post's ‘Must Read” list.Emma regularly comments on issues of modern families, gender equality, divorce, sex and motherhood for outlets like CNN, Headline News, New York Times, Wall Street Journal, Fox & Friends, CNBC, NPR, TIME, MONEY, O, The Oprah Magazine and The Doctors. She was named Parents magazine’s “Best of the Web,” “Top 15 Personal Finance Podcasts” by U.S. News, and a “Most Eligible New Yorker” by New York Observer.A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Read more about Emma here.

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