Your credit score is one of those things that you don’t really think about until you need it. Consider this your wake-up call. You'll thank me later.
You may be happily paying your way through life in cash (go, you!) until one day you realize you need to finance a purchase with credit. It might be a car loan, a mortgage, taking out student loans, or an airline ticket that you want to put on a credit card.
If you haven’t been building a credit history, you may be surprised to find that lenders aren’t that eager to lend you money. They will likely check your credit score and if it’s not high enough, decide not to give you the money you need.
Here’s how to start building your credit history and establish a high score, so you can avoid any financial frustrations in the future.
What is a credit score?
Your credit score is a number that represents how likely you are to repay debt. These scores usually range from 300-850, with a higher score representing better credit.
Why is it important?
Lenders will use this credit score as a way to decide whether you should be approved for a credit card or loan. Without a good credit score, it will be difficult for you to borrow money when you need it.
Aside from using your credit score when applying for a loan, you also may need to provide your credit score and report when renting an apartment. A less than stellar credit score might give the landlord a reason to pick a different applicant.
How is your credit score calculated?
There are a number of things that go into calculating your credit score, but these are some of the most important:
Payment History: Do you have a history of making payments on time? Your credit score will increase from a strong history of on-time payments. Miss one payment – or more – and you’ll see your credit score drop.
Credit utilization: This is how much of your available credit is being used. For example, if you have $10,000 available in credit (the amount your credit card will allow you to charge) and you currently have a $3,000 credit card bill, your credit utilization is 30%. If your utilization is too high, it can affect your credit score because it looks like you’re overstretched.
Length of credit history: Do you have a credit card that you’ve had since you were 18? That’s a good one to keep around because it helps lengthen your credit history. The longer your credit history, the better. Lenders will trust someone more with a long history of borrowing and paying on time.
Hard Inquiries: Each time someone inquires about your credit history and score (a “hard” inquiry), your score will drop a few points. These inquiries generally happen when you apply for a car loan, a mortgage, or a credit card. Your score will recover, but applying for too many things at once can leave your score hurting for a while.
Types of credit: Having more than one type of credit can help boost your score. Think student loan debt and a credit card.
How can you improve your credit score?
If you’ve never had a credit card or a loan (like a student loan), you likely don’t have a great credit history. The primary way to establish good credit is to borrow money and show you’re capable of paying it back. To get started, try applying for a secured credit card. This type of credit card is easy to qualify for because they require a cash deposit that is held as collateral in case you miss a payment.
Pay your bills on time.
One of the best things you can do is to pay all of your bills on time. Because payment history is one of the biggest factors in determining your credit score, you want to have a history of on-time payments to show lenders that you’re capable of borrowing and paying back any debts on-time.
Pay down outstanding debt.
If you’ve gotten yourself into credit card debt, it’s time to make a plan to pay it off. Even if you’re making the minimum monthly payments on time, if your credit is maxed out your credit utilization will be weighing down your credit score.
Understand it takes time.
Your credit score isn’t going to magically improve overnight. But if you put these tactics into action now, by the time you really need good credit for a big purchase, you’ll be in a great place.
Wondering where you stand?
If you want to take a look at your credit history and your credit score, you can do that for free every 12 months. It’s a good idea to check your credit history annually to be sure there are no errors. You can find more information about obtaining your free credit report at AnnualCreditReport.com.