You may be thinking: “I’m not 18, so I can’t even start building my credit” or “I’ll just worry about my credit when I’m ready to take out a loan for a car or a house.” There are many misconceptions with how credit scores work, and I advise everyone to get their credit started and straightened out while they are still young.
What is a credit score and who checks it?
A credit score is a numerical value given to an individual, which represents their likelihood of paying back debts. Lenders do credit checks to decide whether or not to grant a loan and at what interest rate (a higher score yeilding a lower rate), but they are not the only ones who will check your credit score. Statistics show that people with good credit are less likely to file an insurance claim, which is why insurance companies will take your credit score into consideration. Many employers have started to do credit checks to gauge your level of responsibility for certain positions. You may also run into credit checks when adopting a child, renting a car, starting with a new utility company or signing a new cellphone contract. If you are a student, you may decide to live off campus, and many landlords run credit checks, too. And everyone knows that they check your credit when applying for a credit card.
How do I start building my credit score if I have no credit history?
Paying off your student loans on time will contribute to building you credit. There are also credit cards that do not require prior credit history, but the easiest way to start building your credit would be to have your parents co-sign with you on a credit card. If your parents have good credit, you have a much better chance of being accepted for a card good benefits. Credit cards have a stigma of being expensive, but there are plenty of credit cards with no annual fee and your card benefits can actually save you money if you avoid interest payments by paying your monthly balance off in full every month. For example, many credit cards give you 1% back, so if you buy a $2,000 computer, and you pay with your credit card, you are getting an automatic $20 off of your purchase. 1% doesn’t sound like much, but it adds up quickly.
What affects your credit score?
There are six main aspects that influence your credit score. They include:
- Credit Card Utilization
- Payment History
- Derogatory Marks
- Age of Credit History
- Total Accounts
- Credit Inquiries
The first three aspects have the most impact on your credit score. Credit Card Utilization refers to the percentage of your credit limit that you actually use. To maximize your credit score you should try to use between 1%-20% of your available credit. You also want to keep your credit lines active, and avoid having your utilization at 0%. You must consistently pay your loan installments and credit card payments on time to maintain a good credit score. Derogatory marks are very dangerous because they will remain on your record for a minimum of seven years. Derogatory marks are the result of encounters with collection agencies, repossession, and bankruptcy. The average age of your credit accounts plays a moderate role in your credit score and takes years to build. Because of this, you never want to cancel your oldest credit card, thus lowering the average age of your accounts. The number of credit accounts you have and the number of times you inquire about adding or extending a credit line plays a minor role in your credit score. You are seen as more reliable if you have good credit while managing multiple lines of credit, as opposed to just one, and the more credit lines you inquire about adding or extending in a short amount of time, the more unreliable you are perceived, because if take on more credit lines you are taking on more risk.
How do I check my credit score?
There are many ways to check your credit score, but one free and easy way is on CreditKarma.com. The website is completely free because they make their profits off of credit card advertising. The resources on the website can simulate how different changes in your credit accounts will alter your credit score and they also give you advice if there are other credit cards on the market that will save you more money than your current cards are saving you.
Your credit score can be important earlier in life than you may have expected. Just make sure you pay all of your obligations on time, and it might not be a bad idea to put those dates on your calendar.