Credit is a vital part of today’s financial world. Your credit score will factor into many large decisions over your life. It can be difficult to make large purchases with low credit scores. Getting approved for a rental, mortgage, car loan, or credit card is much harder, if not impossible, without decent credit scores. Having low credit scores could even affect your ability to get certain jobs.
Building a good credit score is essential for all the big decisions you will make in adult life. If you aren’t sure where to begin, we’ll help you get started! This guide covers what a credit score is, why it matters, how it is calculated, and how you can maintain it. Read on to learn more about your starting credit score and how to establish credit.
Why is Credit Important?
Building good credit is one of the most important things you can do as an adult. Why is building credit so important? The thrush is, many important life decisions you will make will revolve around your credit scores. A good score will enable you to get better loans, better mortgage rates, better credit cards, and higher credit limits. All of these things make your life much easier.
It’s a good idea to build credit early on. All kinds of lenders will check your credit scores before lending you any money. You will qualify for better and larger loans the better your credit score is.
Some employers check your credit report during the hiring process. Some employers consider poor credit history to be a sign of poor decision-making. Keeping your credit score higher increases your chances of landing that dream job.
There are many benefits to building and maintaining a good credit score:
Getting approved for cards and loans
- Having lower interest rates
- Receiving better terms
- Better benefits
- Getting approved for loans
- Getting approved for credit cards
What Does Your Credit Score Start At?
You might think that a starting credit score is 0, but that isn’t the case. A credit score starts at 300. Credit scores range from 300 to 850. If you have yet to begin your credit journey, your score should be 300. A credit score of 300 indicates to lenders that you have little or no credit history, or that you have had trouble with credit in the past.
How are Credit Scores Calculated?
There are many things included in how your credit score is calculated. Things that can be included to calculate your credit score are:
- Payment history- This is a record of all of your payments. On-time payments make your score go up. Late payments or skipped payments make your score go down.
- Money owed- How much money you owe on credit cards and loans. Lower amounts of money owed make your score higher.
- Length of credit history- A long credit history looks better to lenders. Short credit history makes it difficult to get approved for loans and credit cards.
- Kinds of credit accounts- What kinds of credit accounts you have will affect your credit score; namely, whether they are revolving, open, or installment accounts. Also called your credit mix.
- Recent credit activity- Lenders look at this to make decisions. If you recently defaulted on a loan, that will drastically affect your score.
- How many lines of credit do you have- Having too many open lines of credit can hurt your score.
What are Consumer Credit Bureaus?
Consumer credit bureaus are entities that collect, compile, and store credit reports. Often, lenders will pull credit file data from just one credit bureau, but sometimes they will pull from several. There are three main consumer credit bureaus; Equifax, Experian, and TransUnion. Check your credit score from each agency to get the best picture of your current standing.
What is FICO?
- A credit-scoring model is a scoring system that’s used to calculate your score
- FICO® credit-scoring model, developed by the Fair Isaac Corporation
- Widely known model
- Lenders use to help make decisions about lending
- credit scoring models
How to Build Your Credit
Building a good credit history can be tricky and take a lot of time and effort. Thankfully, some things will help you build better credit more quickly. There are several different ways you can start building your credit up:
- Open a credit card
- Become an authorized user of a credit card
- Get a co-signer
- Make payments on time
Apply for a Credit Card
Applying for and opening up a new credit card is one of the most common ways to start building up your credit. If you have little or not credit history, it may be difficult to get approved for a credit card at first. If this is the case, you can try using a secured credit card.
A secured credit card is a great way to get started building your credit. Secured credit cards usually require you to deposit a minimum amount of money. $200 deposits or more are common. Once you have used this type of card to improve your credit score, you can apply for an unsecured credit card. For best practice, make sure you pay the full amount of your credit card bill every month.
Be an Authorized User
Becoming an authorized user on someone else’s credit card is a great way to start building a credit history. Ask your close family members or your partner if they’d be willing to add you to their credit cards as an authorized user. The credit card payment history will automatically be added to your credit files.
Make sure the person you choose has a long history of making payments on time. You’ll see your scores increase just by being an authorized user, whether you ever use their credit card or not.
Borrow With a Co-Signer
It is difficult to get approved for a loan or a credit card if you have little or no credit history. One thing you can try is applying with a co-signer. You can get approved for a loan or credit card with a co-signer. A co-signer would be on the hook for the loan if you are unable to pay. It is important to ensure your co-signer understands this.
Make sure to make all of the payments on time. This will ensure you improve your credit score, and that you don’t leave your co-signer on the hook for the loan.
Paying Bills on Time
Your payment history is an essential part of your credit scores. A questionable payment history makes you look unreliable to a money lender. You have to pay your bills every month, so you might as well pay your bills on time and improve your credit score!
So, what sorts of bills get reported to the credit bureaus? All of your monthly payments for things like your mortgage, car payment, and credit card payments are reported to the credit bureaus. Make all of your payments on time, and you’ll see your scores improve over time.
Staying on Top of Your Credit Score
Having a good credit score is essential for all of our big life decisions, like buying a car or a home. Even getting that great job could depend on your credit score. Building a good credit score can take a lot of time and determination, but it is worth it. A credit account that has been reported negatively affects your credit scores, so it is important to stay vigilant.
Once you have built up a high credit score, how do you maintain it? There are several different things you should keep in mind when it comes to managing your credit scores:
- Always pay loans on time– Don’t skip payments or pay them late. This can negatively affect your score.
- Don’t borrow more than you need– It’s a bad idea to borrow more than you need. If you borrow less, it’s easier to pay off, keeping your credit scores higher.
- Don’t max out your credit limit; keep balances low- Maxed-out limits are harder to pay off. Keep your balances low to ensure you can pay your credit cards off every month.
- Continue to build a long credit history- You can’t stop maintaining your credit score. It is very important to keep building a long history of on-time payments. Lenders like to see this.
- Only apply for credit you need- Don’t take out loans you don’t need. If you fall on hard times and are unable to keep up with the payments, it will drastically lower your credit scores.