It may come as something of a surprise, but less than 2 percent of Americans have a perfect FICO score. The rest of us could use a boost. One of the tried-and-true methods to increase scores involves using credit cards to build credit. This financial technique applies equally to those who have no credit history as well as those with blemishes on their reports. If you're concerned that being credit invisible or having a low FICO score will hinder your borrowing ability, these are some ways that using credit cards to build or repair credit can help.
Set Credit Score Goals
Visualizing realistic goals starts with identifying your credit score. You can request a free copy of your credit report every 12 months from the three major reporting bureaus — Experian, Equifax, and TransUnion. After receiving your copies, you’ll be able to determine if you have a credit history, what's on your credit report, and fix any errors. More than 28 million Americans have not effectively established credit history. Another 48 million can only borrow at elevated interest levels due to subpar or poor FICO scores. These are the way lenders typically view FICO score ranges.
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
Unfavorable credit scores are typically driven by the money management mistakes people make. Late payments on credit cards, utility bills, car loans, and overdraft errors on bank accounts all count against your FICO score.
It’s also common for young adults to be unaware of how credit works, what steps to prepare for when applying for credit, and how to apply for credit largely because it wasn’t something they worked on before turning 18. Entering adulthood without the ability to utilize lines of credit or secure a car loan, unnecessarily limits college students and those embarking on a career.
Where you start the credit score building process will have a direct impact on how quickly it can be increased. But the good news is that anyone can establish or re-establish a viable FICO score; however, it just takes time, effort, and consistent responsible money management practices.
How Long Does It Take To Use Credit Cards to Build Credit From Scratch
Just because you haven’t taken out a loan or used a credit card doesn't mean you have zero credit. In many cases, the credit reporting bureaus have a file so thin it simply can't generate a FICO score based on their metrics.
Things like phone bills, utilities, or savings accounts are like credit seeds ready to germinate and bloom once they’ve been watered by a more pronounced form of borrowing. These are ways to build a credit score from virtually nothing.
Sometimes people are surprised to discover their FICO score has been effectively decommissioned due to a lack of reporting. If you haven’t utilized credit in a long time, these strategies can also kickstart your FICO score.
At the end of the day, the million-dollar question is “How long does it take to build a credit score from scratch?” Typically, a person needs to have a loan, line of credit, or another qualifying account open for a minimum of six months to start building credit. With regular on-time payments, savvy debt-to-credit utilization, responsible money management practices, and other favorable factors, you could have an actionable score within six months to a year.
Reveal the forgotten perks that only the best credit cards offer by downloading our free guide:
How Long Does It Take to Use Credit Cards to Repair Credit
It may seem counterintuitive, but rebuilding a FICO score can be more challenging than starting from scratch. Things that damage credit scores can linger on the report for years in some cases and need to be rectified and timed out.
When people have an account that slides into collections or economic setbacks result in adverse financial situations like foreclosure or bankruptcy, these blemishes can remain on their credit report for upwards of five to seven years.
The thought of a tainted credit report for that long may make you feel like throwing up your hands and quitting. But what most people don’t realize is the impact of collections actions, bankruptcy, and even foreclosure wanes over time. This is a general timeline for how quickly consumers can start the reparation process.
- Hard Credit Pull: Applying for a credit card or loan usually lowers a credit score slightly for about three months.
- Shutting an Account: Closing a credit card out reduces your overall borrowing bandwidth. It can also lower your FICO score for about three months.
- Maxed Out Cards: Reaching your borrowing limit affects your debt-to-credit ratio. That’s why maxing out credit cards lowers scores for about three months.
- Missed Payment: Missing a monthly installment for a credit card, personal loan, phone plan, or another account stays on your report for 1-2 years.
- Bankruptcy: Filing for bankruptcy wipes out debt and leaves creditors unpaid in many cases. The gravity of defaulting is why this action negatively affects people for seven years or longer.
The positive side of rebuilding your credit score is that every action you take helps raise the number. A series of positive efforts could easily increase a poor 500 score to what lenders consider a “fair” FICO score of 580 to 669 within a year to a year and a half.
Tips for Using Credit Cards to Build Credit
Credit bureaus consider wide-reaching types of accounts when calculating a FICO score. Any improvement strategy requires consistent, on-time repayments of all your accounts. By making full monthly installments on other accounts, using credit cards to build credit can eliminate invisibility, improve poor scores, and open the door to rewarding borrowing opportunities. These are ways to achieve your goals.
- Clean Up Your Credit Report: It’s not unusual to discover errors in a credit report. After receiving copies, check the documents thoroughly and request any errors or omissions be changed. Fixing mistakes can improve your FICO score within three months.
- Get the Right Credit Card: Conduct some due diligence regarding the type of credit card that best suits your needs and current FICO score. Big corporations may offer high-interest cards to swell their bottom line. Local credit unions, on the other hand, are more inclined to provide lower rates and fees including those without credit or low scores.
- Monitor Credit Utilization: The formula used to calculate FICO scores gives a higher number to people who utilize 30 percent or less of their total available credit. Staying within 30 percent can help speed up the credit-building process.
- Utilize Payment Strategies: Making full and on-time payments is essential to using credit cards to build credit. But paying off the balance each month can fast-track FICO score improvement.
Remember that using credit cards to build credit calls for smart financial decision-making. Avoid applying for new cards too soon because these hard pulls will likely lower your score, at least temporarily.
Peach State Has the Right Credit Card to Help You Build Credit
If you want a credit card to help you build or rebuild credit, Peach State has the right credit card for you. Our low rate cards feature no annual fee and no penalty APR (annual percentage rate), and some even come with rewards.
If you're a student at least 18 years of age, you should explore the great features our Student Platinum with Rewards Credit Card offers. With fee-free cash advances, no annual fee, and no penalty APR, this card is designed to help young adults build credit while earning rewards as they spend.
If you aren’t sure which credit card is best for your unique situation, please contact us today. We'll be happy to help you find the best solution for your needs.
For more tips on using credit cards to build credit, review our "The Best Credit Cards Always Offer These Hidden Benefits" complete guide!
