Age may be just a number, but the same can’t be said of credit scores. Your credit profile is tied to many financial opportunities, which is why it’s in your best interest to monitor your credit — and have your own personal score goal.
No matter how many birthdays you’ve had, the journey to good credit can start right now. Direct your financial future with these five credit knowledge know-hows.
1. Jump In With a Secured Credit Card
Getting approved for a credit card may be hard. If that’s the case, applying for a secured credit card, which is issued after putting down a cash deposit, may be the way forward.
Once you receive the card, make small purchases and meet your payment deadlines every single time. After one to two months, you’ll have enough credit records to receive a credit score from VantageScore, a consumer credit scoring model created and used by the three major credit bureaus, Experian, Equifax and TransUnion.
(Eventually you’ll also receive a credit score from FICO, which usually requires six months of activity before it will generate a credit score.)
2. Watch Your Credit Utilization Ratio
If your new credit card has a $500 limit, don’t go nuts. The amount of debt you have relative to the credit limit, a ratio know as credit utilization, is a key factor in determining your credit scores. Keep your credit utilization below 30%.
So, if you have a $500 credit limit, sticking to the 30% utilization recommendation means keeping your balance below $150.
3. Get a Loan With a Co-Signer
If you’re new to credit, getting approved for a loan might not be possible without a co-signer.
Typically a co-signer is a friend or family member with good credit. The co-signer is the lender’s guarantee that if you default on your loan payments, there’s someone else who’s required to fulfill the debt obligation.
Once you’re approved for the loan, you need to make your payments on time, every time.
4. Become an Authorized User
You can also become an authorized user on a spouse’s or family member’s credit card. As an authorized user, the card’s payment history becomes a part of your credit profile, which is great if the history is a good one and the payments have historically been made on time. Bear in mind, if the Authorized User doesn’t make payments on time, it will affect your credit too.
5. Remember the Five Factors
Building your credit knowledge also means being aware of the five factors that affect your credit score. They are:
Credit Mix: This is the different types of credit you have, from revolving debt (credit cards) to installment debt (loans). Credit mix accounts for approx. 10% of your total score.
Credit Inquiries: Every time you apply for a new credit card or loan, the creditor or lender will check your credit report, and this is called an inquiry. Too many inquiries will negatively impact your score. Be strategic about what credit you apply for because inquiries account for 5% of your scores.
Credit Age: The older your accounts are, the better. As you continue to build your credit, keep older accounts open to show lenders you’re dependable. Credit age is 10% of your credit score.
Outstanding Debt: If you have too much debt, lenders will consider you high risk. Keep your debt in check (see credit utilization above) because it accounts for 35% of your credit score.
Payment History: This is the biggie, accounting for 40% of your score. Make your payments on time, every time. Even missing one payment deadline can knock down your credit scores.
Good credit is essential to helping ensure you pay the best interest rates in the future, and get invited to the best offers from lenders and creditors.