How Long Does It Take to Build Credit from Nothing?

How long does it take to build credit from nothing? Get tips and insights on our blog to get started and build your credit.
Bruce Hodges
April 10, 2024
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How Long Does It Take to Build Credit from Nothing?

Building credit from nothing can be frustrating and time-consuming, but the good news is that it's possible for absolutely anyone. Whether you're just starting out your credit journey, new to Canada, or aiming to repair it after a hit, we'll go over everything you need to know.

A good credit score is essential for various financial transactions and opportunities, such as obtaining loans, renting an apartment, or even getting certain jobs. Unfortunately, it's not an overnight process. It requires patience, discipline, and good habits. With the right approach, you can start building a positive credit history and improve your credit score over time.

Let's go over all the knowledge that will help you succeed in your credit-building journey.

Key Highlights

  • It can take several months to establish your credit score, and you'll need to continue your efforts throughout multiple years to maintain a solid credit history.
  • You must have at least one account open and report to the main credit bureau for a minimum of six months to generate a FICO score.
  • Becoming an authorized user on someone's credit card and having payments reported can also build credit.
  • Maintaining your credit growth is also important. Setting credit alerts and understanding your credit report can help.

Understanding the Basics of Credit Building

Before diving into the specifics of how long it takes to build credit, let's first understand the basics. Your credit score is a three-digit number that reflects your creditworthiness. It is calculated based on the information in your credit report, which is a comprehensive record of your credit history.

Credit bureaus, such as TransUnion and Equifax, collect and maintain credit information on individuals. Lenders and creditors report your payment history, credit utilization, and other credit-related activities to these bureaus. Your credit score is then derived from this information.

FICO is an algorithm that's commonly used by lenders, so knowing your FICO Score can help you be prepared when applying for credit.

A good credit score generally falls in the range of 670-739, while an excellent credit score is typically 740 or above. A higher credit score indicates to lenders that you are a responsible borrower and more likely to repay your debts on time.

What Influences Your Credit Score?

Several factors influence your credit score. A FICO Score is calculated by the following ratio:

  • 35%: Payment history (Paying your bills on time)
  • 30% Outstanding debt (How much debt you have in total)
  • 15%: Credit history length (The age of your oldest account)
  • 10%: New credit (How many credit accounts have you applied for in the last 12 months)
  • 10%: Credit mix (If you have a variety of different types of accounts, like revolving and installment accounts)

FICO is a common algorithm used to calculate your credit score, but it's not the only one. This is why your score may be different depending where you check it. The exact weight assigned to each factor may vary, but understanding the basics is essential to get started.

Initial Steps to Establish Credit

To establish credit for the first time, it's a good idea to start with a few key steps. Your credit will not build itself, so taking action as soon as possible can seriously speed up your growth. Although credit history will always be a factor, and you can't control how much time you've been working on your credit, these initial steps will help you build a strong foundation.

Step 1: Choose the Right Credit Card

When choosing your first credit card, it's important to consider a few key factors. Look for a credit card from a major credit card issuer or a secured credit card, as these cards are widely accepted and will likely have the best rates. Choosing a promotional or store-branded credit card is most likely not the right choice as the rates and penalties are often much higher.

Consider the following when selecting your credit card:

  • Credit limit: A higher credit limit can provide more flexibility in managing your credit utilization. However, be mindful of your spending habits and ensure that you can comfortably make the monthly payments.
  • Annual fees: Some cards may have an annual fee, while others may not. Consider whether the benefits of the card outweigh the cost of the annual fee.
  • Accessibility: If you have little to no credit history, it may be difficult to find a card with good rates, or even get accepted at all. You may consider a secured card, or a card designed specifically for credit-building. These cards not only have better acceptance rates, but they may also help you build healthy credit habits. A win-win!

Strategies for Fast Tracking Credit Growth

If you're looking to fast track your credit growth, there are a few strategies you can employ. The more proactive you are about proving your credit-worthiness, the faster your score will grow.

Becoming an Authorized User

Becoming an authorized user on someone else's credit card can have several benefits for building credit. When you become an authorized user, the primary cardholder's credit history and account information are reported on your credit report.

This means that if the primary cardholder has a long and positive credit history, it can help boost your credit score. It's important to choose a primary cardholder who has good credit habits and makes timely payments. Their positive credit behaviour will reflect positively on your credit report. Ensure that the primary cardholder is aligned with your goals, and that clear rules and boundaries are set. You should both agree on how the credit card will be used and make sure that the primary cardholder is aware of your intentions to build credit. Becoming an authorized user on a credit card account is a great way to build credit from scratch, as it adds length to your credit history and shows responsible credit behaviour.

How Rent Payments Impact Your Credit Score

Rent payments, traditionally, are not reported to credit bureaus and, therefore, do not directly impact your credit score. However, there are ways to have your rent payments reported. New services have been developed to make this possible in Canada, and the concept is gaining popularity.

One option is to use Borrowell's Rent Advantage, a program that allows you to include your rent payments in your credit history. Rent Advantage works by linking your bank account to your credit report and adding positive payment history for your rent payments.

By having your rent payments reported, you can build a positive credit history and demonstrate your ability to make consistent and timely payments. It's important to note that not all landlords or property management companies report rent payments, but this is an option that can be explored.

Monitoring and Maintaining Your Growing Credit

Once you start building credit, it's important to monitor and maintain your growing credit. This is not a one-and-done situation. You will need to stay informed, keep working at it, and focus on your goal. The key is to build good habits that eventually become second nature. This includes making timely payments, keeping your credit utilization low, and avoiding excessive debt in the long run.

Here are a few habits to focus on:

Set Up Credit Alerts

Setting up credit alerts can help you stay on top of your credit and be notified of any changes or potential issues. Credit alerts are notifications sent by credit bureaus or credit monitoring services to inform you of any significant changes to your credit report. These alerts can help you detect fraudulent activity, such as unauthorized credit inquiries or new accounts opened in your name. They can also notify you of missed payments or changes in your credit utilization. Overall, this is an option to keep you informed, and it's usually accessible through free credit score services like Credit Karma.

If you can't set up an automated report, simply set a date in your calendar each month to manually check your report. This will also ensure you are always up-to-date.

Understanding Credit Report Details

Now that you've set up your alerts, how can you use the information? You'll need to know and understand the report in order to take action. Your credit report contains information such as your personal information, credit accounts, payment history, and public records. Here's what you'll want to look for:

  • Ensure the accuracy of your personal information and identify any errors or discrepancies.
  • Check for any late payments recorded on the report. If it's incorrect, you can dispute it. If it's correct, you can inform yourself and ensure it doesn't happen again.
  • Check your credit utilization ratio and explore opportunities to lower it.
  • Dispute any inaccuracies or outdated information to have them corrected or removed from your report.

Balancing Your Credit Utilization

Maintaining a balanced credit utilization ratio is crucial for a good credit score. Your credit utilization ratio, also known as your credit utilization rate, is the percentage of your available credit that you are currently using. To balance your credit utilization, aim to keep it below 30%. If your credit card balances are consistently close to or at their limits, it can negatively impact your credit score.

Consider paying down your credit card balances or spreading out your charges across multiple cards to keep your credit utilization ratio low. Additionally, you can request a credit limit increase on your credit cards to increase your available credit and lower your credit utilization ratio. It's important to only consider this strategy if you are comfortable with your spending habits, and confident that the increase in your credit limit will not lead to an increase in overall spending.

Overcoming Common Credit Building Challenges

While building credit, there are a couple of common challenges you will likely face at one point or another. Being prepared for these challenges ahead of time can help you overcome them, or avoid them altogether!

Challenge #1: Late Payments

Late payments can have a significant negative impact on your credit score. They are one of the most important factors in determining your creditworthiness. A common issue that people face is simply not understanding the importance of paying on time, or not paying attention to deadlines. Establishing good payment habits as soon as possible can help you ensure that late payments don't drag your credit score down. Consider:

  • Set reminders or automate payments to avoid missing due dates.
  • If you have a tight budget, or struggle to make payments due to missing funds, always aim to contact the payee ahead of time. See if you can adjust your payment frequency or even skip one payment, rather than letting a missed payment take place.

Challenge #2: Hard Inquiries

Hard inquiries occur when you apply for new credit, such as a credit card or loan. Each hard inquiry can have a temporary negative impact on your credit score. This is another aspect of credit building that can be easily overlooked. To avoid excessive hard inquiries, be cautious about how often and where you apply for credit. Too many inquiries within a short period can raise red flags for lenders and potentially lower your credit score. When shopping for credit, such as a mortgage or auto loan, try to do your research and submit applications within a short time frame. This allows multiple inquiries to be counted as a single inquiry, minimizing the impact on your credit score. Applying for credit should be considered a big decision, so treat it as such and be mindful of what you're applying for.]

Building Credit With Parachute

Parachute’s financial well-being platform is directly aligned with building your credit score. Members are rewarded by taking the right actions each month, including the top 4 goals:

  • Pay Parachute on time
  • Pay all your bills on time
  • Maintain low credit utilization
  • Don’t take on new debt that isn’t necessary

Each of these goals is a step towards better credit, and better financial well-being overall. If you want to learn about the Parachute platform and options for debt consolidation, click here.

Frequently Asked Questions

How long does it take to build credit from nothing?

6 months is a healthy range to consider getting your credit to a base level. However, the time it takes to see a significant improvement in your credit score can vary depending on your credit history and the actions you take. It can take several months to a few years of responsible credit management to see noticeable improvements, especially if you have a poor credit score to begin with.

Can paying off loans early negatively affect my credit score?

Paying off loans early generally does not negatively affect your credit score. In fact, it can have a positive impact by demonstrating responsible credit management and reducing your overall debt. However, it's still important to maintain a good payment history and continue making timely payments.

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
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