Nearly every major life event involves a credit check. Signing up for a new cell phone contract? Credit check. New car loan? Credit check. Renting a new apartment or applying for a mortgage? You guessed it.
Your credit score is the most telling financial information a lender has access to, because this score is based on your repayment history. If you always pay your credit bills on time and in full, then this will be reflected in your good credit score. That's why credit checks are performed for practically every large purchase or long-term contract that relies on steady repayments. A good credit score will get you the loan on a house or car; a bad credit score will get you nowhere.
Building and maintaining a strong credit score is the #1 way to ensure you will enjoy a comfortable life and financial stability in today's banking landscape. It's so important that you'd think a basic credit course would be mandatory for every high school student to take. Yet mind-bogglingly enough, it's not. Perhaps that's why there's record high debt among young people today.
An article in Time Money tells us that among students who borrowed money to go to college, 27.2% are now graduating with excessive debt that can't be repaid within 10 years, including student loans and credit card debt. Students who leave school with this much debt are 10% more likely to say the debt has caused delays in achieving major life events like buying a home, getting married, and starting a family. And these young folks aren't alone: the average American family has $8,377 of continuous, unpaid credit card debt — and by extension, terrible credit scores.
This is not a sustainable situation.
Clearly, having good credit is absolutely necessary to reaching even the most basic life milestones. Whether you're young and have no credit experience, or older and want to improve your score, keep reading to find out how to start, maintain, and raise your credit score high enough to be able to reach your unique goals.
Easy Ways to Build Your Credit Score
Strangely enough, having no credit is just as bad as having bad credit, because lenders simply have no idea what kind of spender and banker you are and will refuse to loan you money. So, the first step to having a good credit score is to actually establish some credit. This means getting your first credit card from your bank; that being said, it's important to note that not everyone should have a credit card. A great reddit thread that focuses on how to improving your credit score says that opening a credit card is completely inappropriate for someone who has no emergency fund, plans on living beyond his/her means, does not have an income, has excessive spending habits that have not been dealt with, and/or does not have a budget. If you do have an emergency fund and have the self-control to avoid overspending on your new credit card, then you are probably in the right mindset to get your first card and start building credit.
When you're building your credit history from scratch, your bank might offer you a credit card with a low spending limit based on what the bank knows about your income and banking habits from your existing account. Another option is to apply for a "secured credit card," which is backed by money that you deposit before you begin using it. The deposit is usually in the same amount as the limit on the card. This card is temporary and its sole reason for existence is to help you start building credit. For example, your secured credit card might have a limit of $500. So, first you give the bank $500 to hold onto. Outside of the deposit, this credit card functions just like a regular credit card. You still get a monthly bill that you need to pay off on time. The difference is that your lending bank has the deposit as collateral if you fail to pay your bill. You will get the deposit back when you close the account. After making regular payments on this card for a few months to a year, you will have enough credit to apply for an unsecured (normal) credit card with better benefits and a higher spending limit.
Another option to building credit is to become an authorized user on someone else's credit card account. This arrangement means that the primary cardholder is responsible to cover your bill if you fail to pay it. To get this kind of card, you can ask a family member or significant other to add you as an authorized user on their account. This way you will be able to access a credit card and begin building credit. Before you do this, check with the card issuer to ensure that they report authorized credit use to the credit bureau. You need to make sure they do this, or else all your hard work to build good credit won't even get recorded! Just be aware that this option requires a lot of trust between you and the main cardholder. Make sure to have a clear conversation beforehand and make a serious verbal commitment to pay your card off, even though you're legally not obligated to do so.
Determining Your Credit Score
If you've been using credit for a while, then you'll want to find out what your credit score is right away. That way you can determine if you're already doing well or if you need to work on improving your score.
Your credit score is a simple number on a scale between 300 to 850. Every lender has their own standard for what a "good" score entails, but generally, credit score ratings look like this:
- 300-629: Bad credit
- 630-689: Fair credit, also called "average credit"
- 690-719: Good credit
- 720 and up: Excellent credit
To find out your score, once a year you can request a free copy of your credit report from each of the three main credit reporting agencies, Equifax®, Experian®, and TransUnion®. Just go to AnnualCreditReport.com or call toll-free 1-877-322-8228. You can also access a copy of your credit score within 60 days if you've been denied credit or if you're on welfare, unemployed, or if your report has any mistakes in it.
This last point is very important: your credit report might have errors or inconsistencies in it that are lowering your score. Therefore, you MUST check your credit report once a year and read it through carefully to make sure everything's aboveboard. Wells Fargo says that if you find an error, ask for a dispute form from the agency with the mistake within 30 days of getting your report. Get it done! Your score will thank you.
Easy Ways to Improve Your Credit Score
No matter what your score is right now, here are some super easy ways to start improving it, right away:
- Make all of your payments on time. This includes fully paying your credit bill (yes, all of it!), your utilities, and any rental bills. Any bills you don't pay might be reported and will immediately begin to hurt your credit score
- Keep your credit utilization low. Your credit utilization is the percentage of your credit limit that you use- for example, if you have a $1,000 limit and you used using $500 on your card, then you're at 50% credit utilization. Try to keep your credit usage at 30% or less, and make the rest of your purchases in cash or using your bank card. At no point should your card be maxed out. This is guaranteed to cause you problems with paying your entire bill on time, and will hurt your credit score. Just make sure to take your time making bigger purchases so you don't have to make them on credit. You can always get a new tv/pants/gaming system/shoes next month, when you have more money in the bank.
- Avoid having too many accounts open at the same time. Part of your credit score depends on the "age" of your accounts, so having too many new accounts lowers the age of your credit history. Having a longer or "older" history gives you more clout with lenders and raises your credit score.
- Keep your accounts open as long as possible to make the most of your repayment history and credit utilization. Try to do this unless you have an unused card with an annual fee that will be eating away at your money.
- Finally, keep tabs on your credit report and check it every year to make sure there are no errors.
As one last piece of advice, Ann Carrns of the New York Times reminds us NEVER to take a cash advance on a credit card, because unlike other transactions, interest on cash advances begins immediately. Other actions to avoid are already implied by our Credit Building To-Do list above: (1) don't ever let your bills go unpaid, (2) don't max out your credit cards, and (3) don't have more credit cards than you can handle!
Building good credit is all about keeping track of your spending on a daily, monthly, and yearly basis- and making sure to repay your bills on time. Simply put: don't live beyond your means or buy anything so expensive that it would take you months to pay back the money it. Once you get started, that's really all there is to the credit game!
Making the effort to create, build, and maintain a good credit score, will allow you to reach all the great life milestones you desire. That's definitely worth the effort of playing the game right!