By Nicolette S.
I know credit scores can be intimidating but they aren’t as scary as they sound. A credit score is a number that ranges from 300-850 representing the credit of a consumer. The higher the score the better. Your credit score directly impacts how much you might pay for future credit. It can also be known as a FICO score as it was created by the Fair Isaac Corporation, the FICO score is most commonly used.
Why you should start early
It is important to start building your credit early on for several reasons. Having a good credit score can help when applying for credit and getting approved for student loans. Especially as young adults we are deemed high risk so getting a loan can be particularly more difficult. When it comes time to move out whether that is at 18 or 25 having a secure score can increase the likely hood of getting a loan with lower interest rates for your first home. Sometimes having a good credit score can even impact a smaller line of credit such as a phone plan and getting approved for insurance. In rarer cases having a bad or non-existent credit score can prevent you from getting a job you want as you may seem untrustworthy to a potential employer.
How to Establish Credit
One simple way to begin to establishing credit is to open a credit card. Getting a secured or student credit card first is a good way to start. A secured credit card is a card that is backed up by a cash deposit and the credit limit is usually equal to that deposit. The credit is “secured” by your deposit and therefore limits the risk to the creditor. Student credit cards are meant for college students who are new to credit and often offer benefits such as cash back and rewards. Be careful not to open too many cards at a time as that can negatively affect your score.
Another way to begin is by asking a parent or loved one to be added to their credit card as an authorized user. An authorized user has permission to use the card but not legally responsible for paying the debt. But make sure every purchase is approved by your parents, you might not be legally responsible but it’s important to stay trustworthy especially while building credit! Furthermore, you can take out a small credit builder loan which ranges up to $1,000.
My Credit Journey
I started building my credit when I was in high school by becoming an authorized user on my parents’ card which gave my credit a boost to start. When I bought my car, my parents put me as a co-signer for the loan as well and it gave me another form of credit to be judged by. Finally, my credit was secure enough to get my own credit card that my parents help support the payments on to increase my credit as well. Not everyone can establish credit in this way, my personal experience worked for me and I was able to work up to what is considered a “very good” score.
Factors to the Credit Score
A main factor to the credit score is your utilization rate. The utilization rate is the amount of debt you have compared to the amount of debt you are able to acquire. It is how much you owe divided by your credit limit. Generally, a good rule of thumb is to keep the utilization rate under 30%. Late payments can also negatively affect your credit and accumulate more interest.
Another factor to your credit score is how long your accounts have been established. The longer the account has existed the better. Unpaid bills and bank overdrafts can also lead to a decrease in your score. Surprisingly, closing credit cards can negatively affect the score by decreasing the amount of credit available to you and increasing your debt to credit ratio.
Do’s and Don’ts
§ DON’T miss payments
§ DO pay off an account before closing it
§ DON’T take on too much debt
§ DO pay off all credit card balances every month
§ DO check your credit history
§ DON’T close old credit cards
§ DO use your credit card rewards
Sources: Experian, State Farm, Nerd Wallet, Money.com, Investopedia, Discover
Images: Experian, Turbo