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How to Build Your Credit From Scratch

Erica Sandberg

January 18, 2013

QDear Erica,

I got my first credit card this week. When do I get my credit score? — Steve

AHi Steve,

Assuming that you've never had any other loan or credit line from a bank that reports to the three major consumer credit bureaus (TransUnion, Equifax and Experian), your credit scores begin … now!

You see, prior to doing business with a financial institution that reports to the bureaus, your reports are blank. There is simply nothing to report. Additionally, credit scores are derived only from the data on your credit files, so it stands to reason they also don't begin until you start to borrow money.Ask Erica

Anyway, you have a credit card now, and because of that, the bank will begin to send some information about you to the credit bureaus — even if you haven't had a chance to swipe the card. For example, the card issuer should have notified them of the date the account became active and the amount of your credit line.

There are many types of credit scores, but the most common is the FICO score. These scores range from 300 to 850, with higher numbers being indicative of less risk to lenders. The most important factor in the FICO scoring model is payment history (whether you've made your credit account payments on time). That alone makes up 35 percent of your FICO score. After that it's how much outstanding debt you have compared the amount you can borrow (30 percent), how long you've had and used credit (15 percent), the various types of credit you've got (10 percent) and pursuit of new credit (10 percent).

Since you've only just started the process, you don't have an established payment pattern to gauge — or pretty much anything else except for potential debt. Therefore, your FICO score is probably quite low. I can't say exactly what it is, but you can find out by ordering it.

Unlike credit reports, which are free if you order them once per year from AnnualCreditReport.com, you do have to pay to check your FICO score. Still, at around $20 at MyFICO.com, it's worth the outlay if you want to monitor your progress.

As soon as you useand repay the card in earnest, you'll see movement in your scores. You can drive them high with just a few simple techniques:

  1. Charge a little each month.
  2. Pay off the total balance, rather than just sending the minimum.
  3. Send payments before the due date to keep your credit utilization low when the bank reports to the credit bureaus.

Keep this up for about a year, and you'll see a dramatic rise in the numbers because you will be satisfying the most heavily weighed scoring factors. Add a different type of card or loan to your mix at some point (without applying all over the place for products you don't need or qualify for), and treat all subsequent obligations as well as you've (hopefully) been treating that first card. Soon you'll have excellent credit.

Remember, though, that as important as impressive scores are to lenders and other businesses that access and assess them, try to not get obsessed with them. Scores fluctuate, and a little dip here and there is expected. As long as they're trending upward until they reach the “ahhh” zone (mid-700s), you're fine.

Essentially, your credit report needs to reflect your responsible actions with money and credit. It should plainly show that you can repay every dollar you borrow according to the terms of the contract. Do that, and your credit scores will naturally increase. However, if you fail — by charging so much that your balances reach the limit and hover there for months, or by falling behind on payments — not only will your reports and rating suffer, but you'll be in costly and oppressive debt.

Got a question for Erica? Send her an email.