Minimum requirements for a credit score
Credit scores come from credit reporting companies. The biggest ones are Equifax, Experian, and TransUnion. These companies provide both FICO® Scores and VantageScores. FICO is the most well-known credit score, and VantageScore is another credit scoring model some creditors use. They are similar in many ways.
To give you a credit score, the credit reporting company relies on information that it gets from companies that have a connection with your money. They can be:
- Banks
- Lenders
- Insurance companies
- Collection agencies
- Credit card issuers
- Utility providers
- Cellphone companies
- Government agencies
- Some employers
- Some landlords
Even with all those sources, some people don't have a credit score. It's not enough to have a job, an apartment, and a phone. For a FICO® Score, the credit reporting agency must have information about how you use credit. Your credit file has to contain:
- At least one credit account
- A credit account that has been open for at least six months
- A credit account that has been reported to the credit bureau in the past six months
Plus, your file can't indicate "deceased" (even a joint account with a deceased person can affect your ability to have a credit score).
Fortunately, all of these requirements can be satisfied by a single account.
How can you get a credit account?
Several types of credit accounts are designed for people who have never had credit before (or who are rebuilding credit).
To apply for your own credit card, you need to be at least 18. If you are under 18, you can become an authorized user on someone else's account. If you're under 21 and you want your own account, you will need to show proof of income.
Here are some ways to get a credit account.
Student credit card
A student credit card is easier to qualify for than a traditional credit card, but there is no difference in how you can use it. Some student credit cards are only for people who can show they are a student, but others allow anyone to apply. Check the restrictions on the card you want before you apply.
Choose a card with no annual fee or monthly maintenance fee. If you pay off your charges by the due date each month, you won't pay any interest, and this will be a free way to build credit.
Secured credit card
To get a secured credit card, you have to pay a deposit. You can use the credit card in the normal way, but you still have to pay the bill each month. Your charges don't get deducted from your deposit. Eventually, after you show that you can use the account consistently and pay your bill on time regularly, you can get your deposit back and switch to a traditional credit card. This usually takes six to 12 months of on-time payments.
There are secured cards with no annual fees or monthly maintenance fees. And if you pay off your balance by the due date each month, you won't pay interest. You can build credit for free with a secured credit card (other than having to pay a deposit up front, which you can eventually get back).
Credit-builder loan
A credit-builder loan is not like other kinds of loans. Instead of getting money and paying it back over time, you have to pay the money back before you get the loan. Here's how it works.
The money you "borrow" goes into a special account that you can't access. You make equal monthly payments for a specific amount of time, usually a year or longer. After you make your last payment, the lender releases the money to you. The amount you get will be less than the total of your monthly payments, because you will pay interest. You may also have to pay an origination fee.
For example, say you borrow $1,200, the interest rate is 8%, and the loan term is one year. Your monthly payment will be $104. You will pay a total of $1,248, but you will only get $1,200 (less if an origination fee is deducted from your portion).
A credit-builder loan can be a great option for someone who prefers not to get a credit card.
How to get credit if you're under 18
People under 18 can't apply for credit on their own, but that doesn't mean they can't establish credit. Here's one way teens can build credit.
Become an authorized user
If you are added as an authorized user on someone else's credit card account, that data might show up in your credit file. Not all credit cards report authorized user data, so if you plan to use this strategy, make sure it's an account that will be reported. If it is reported, you will get a credit score immediately, assuming the minimum requirements for a credit score are satisfied.
You won't hurt the cardholder's credit just by becoming an authorized user. Whether this account helps or hurts your credit depends on how the primary account holder handles the account. If there are late payments or the card is maxed out, both people's credit score will suffer.
Being an authorized user on someone else's account is a good strategy to help a younger teen establish credit, but it's not necessary for someone who is older. Adults over 18 can use the other options above to build credit independently, without anyone's help.
How to build an excellent credit score
Building an excellent credit score is easy. You can accomplish a good credit score in a short amount of time if you:
- Make your payments on time every month
- Avoid carrying a balance on your credit card
- Don't apply for new credit accounts too frequently
That's really all you need to worry about. Other factors are at play, but they show up naturally over time for most people. You don't have to actively work on them.
Here is a little more information about how your credit score is calculated.
People with the highest credit scores have a perfect payment history and very low or no credit card debt. Those two factors have the biggest impact on your credit score, so give them your full attention.
Payment history
Don't miss your payments whenever possible, as this can drag down your score. Paying on time is one of the best ways to boost your score.
Credit utilization ratio
The way debt affects your credit score is more about how you use debt and less about how much debt you have.
Credit scoring agencies look at your utilization ratio. That's your credit card balance compared to the limit on your card. If you have a $500 credit limit and your balance is $250, your utilization is 50%.
You might have heard that a "healthy" debt utilization ratio is 30%. The truth is that debt isn't usually helpful for you. It takes money out of your pocket because you'll pay interest charges.
Use your card sparingly and pay off your charges every month. The higher your credit utilization ratio is, the more points you will lose off your credit score. If you max out one or more cards, you could end up with a low credit score.
Learn more: The Complete Guide to Understanding Your Credit Score
How to get a free credit score
You can check your credit score for free online in a few places. Your bank, credit union, or credit card issuer may offer a free credit score when you log in. Search for "free credit score online" to find more options. Discover and Capital One both offer free credit scores to anyone, even if you don't have an account with them.
Why you have different credit scores
The FICO® Score you get from your bank might be different from the FICO® Score you get from your credit card company. Both of those might be different from the VantageScore you get from a free credit score website. That's OK.
Not every business sends data to every credit reporting agency. So your file at Experian might not match your file at Equifax or TransUnion. Your bank might use Experian and your credit card company might use TransUnion. That's one reason it's important to make sure that any credit account you open to build credit reports to all three big credit bureaus.
Also, when you first start building credit, your VantageScore might be higher than your FICO® Score. VantageScore can give you a credit score even if you have less than six months of credit history or your credit account has been reported within the last 24 months but has been inactive for six months or longer. As time passes, your VantageScore could be higher or lower than your FICO® Score because VantageScores are calculated differently.
Any version of your credit score can give you an idea of how you are doing with credit and things you might be able to do to bring your score up even higher.
Should I get a cosigner?
When someone cosigns for you, they are taking full responsibility for the credit account. If you stop paying for any reason, or if you die, they will have to pay back any money you owe. That's a lot to ask of someone who cares about you enough to want to help you build credit. And it's not usually necessary.
Building credit is not a great reason to get a cosigner. Instead, you can build credit on your own without asking anyone else to take a financial risk for your benefit.
How much debt do you need for a good credit score?
Having a credit score is not the same as having debt. You do not have to have any debt to have a good credit score. In fact, your credit score will be better if you avoid debt.
The credit agencies do need data to give you a score, that's true. You need to have a credit account (or more than one) and you need to use it. Otherwise, no data will be reported and you could end up with a bad credit score or no credit score at all.
Here are a few ideas for building credit without carrying or increasing your debt:
- Use a credit card to autopay your cellphone bill every month. Then use your bank account to autopay your credit card balance every month.
- Ask your landlord to report your rent payments to the credit bureaus.
- Get a credit-builder loan.
Your money is more important than your credit score. The credit card company takes more of your money when you carry debt. You will keep more of your money if you avoid debt.
How fast can you build credit?
Once you open an account and start using it responsibly, you should be scorable within six months. You can build credit fast if you keep up responsible habits. Your score will get better over time because the age of your accounts is a factor.
Learning to take the personal finance reins is a smart move that could help you live without financial fears. An excellent credit score will lower the cost of any money that you need to borrow in the future, and when you pay less in interest and fees, you put more of your money back into your own pocket.
