When and How Do You Get Credit?

When Do You Get Credit?

       Wondering when you get credit? Does some stuff automatically go on your credit report when you turn 18? That’s a no. You get credit when you have opened accounts that report to the credit repositories. 

Your credit builds over time, as you pay accounts monthly and pay them off. Your credit file will increase as you have more accounts. That’s why young people who haven’t been paying accounts long won’t have such a great credit score yet, because their credit history is not long enough.

Accounts You Have Paid Off where you made any late payments generally fall off after 7 years from the date of first delinquency, while closed accounts paid on time can stay up to 10 years. An account you made late payments on will continue to hurt your credit, even if you pay it off. Accounts you have paid on time will continue to help your credit score, even after you pay them off.

Judgments used to show up on credit reports, but that changed in 2017 — the major credit bureaus stopped including civil judgments on credit reports entirely, so they generally won't appear on your credit report anymore. But don't mistake that for "can't touch me." Judgments still show up in public records, and title companies check those records — not your credit score — when you buy, sell, or refinance real estate. An unresolved judgment can still hold up your closing or force you to pay it off at the table. So best to avoid judgments if at all possible. 

A bankruptcy will stay on your credit for 7 – 10 years. Chapter 7 bankruptcies stay on credit reports for 10 years, and Chapter 13 for 7 years, from the filing date.

So…the best and easiest way to get and keep good credit is to have a few accounts that are reporting on your credit report and pay them on time every month. The longer the history you have of paying everything on time, the better your credit score will be.

What counts as "on time" for your credit score? Payments generally aren't reported as late to the credit bureaus until you're 30 days past the due date. But don't treat that as a grace period — pay on or before the actual due date every time. Paying even a few days late triggers late fees and, on some cards, a higher, penalty interest rate can kick in — costs that hit you long before your credit score does.

How do you get better credit?

                Your credit is made up of several different things. Manage each one to have the best credit.

                35% weight – how consistently you pay on time — payments aren't reported as late until                                        you're 30 days past due, but the goal is on or before the due date, every time.

                30% weight – how much debt you have and how much of your available credit you use

                15% weight – how long you have had credit

                10% weight – how many hard inquiries you have 

                10% weight – the types of credit you have

Let’s talk more about these weights. “How you pay” is pretty self-explanatory.  Do you pay by the due date every time?

How much debt you have – a person loaded down with lots of debt is more of a risk because if something goes wrong – they lose their job or become unable to work, for example, unless they have lots of savings, they will suddenly not be able to pay everyone.

How much of your available credit you are using – you may have heard this called “credit utilization ratio”. This is simply the amount of credit available to you on revolving credit vs. the amount you are using or owe.

Revolving credit is credit where you can pay it back and then use it again, such as a Visa or Mastercard. It also includes big box stores. If you have a credit limit on a card of $10,000, and your balance is $8500 of that available credit, your credit utilization ratio is high, and you are more at risk of being unable to pay it back. If you owe $2000 on a card where you are approved to borrow $10,000, that is a low credit utilization ratio and will positively affect your credit (assuming you are paying the minimum payments on time).

How long you have had credit - A HISTORY of paying on time is what lenders are looking for.  That's why an account you just opened and have paid on time for two months is not so much helping you yet.

Inquiries - Never let someone pull your credit unless you are pretty sure you plan to get some kind of credit from them.  You want to limit the number of inquiries you have. 

The types of credit you have - Avoid borrowing from payday lenders and short-term signature loans.  If you have credit with these types of lenders, it will hurt your credit score.  Don't open an account with every creditor that asks you if you want their credit card.