Maybe you’re thinking “I don’t need to buy a car, a house, or anything expensive right now, so why bother getting a credit card?” Or maybe you’re afraid that you’ll mess up your credit score just by looking at it. Whatever boat you’re in, this article will answer all of your most burning credit questions!
Credit is a complicated topic, but also a very important one. Your credit score will impact not only what types of credit you qualify for, but also what interest rates you can get. Credit scores get checked for all kinds of reasons: qualifying for a credit card, car loans, home mortgages, apartment rentals, and sometimes even jobs. In fact, insurance companies even take credit scores into account when determining what rates to charge.
Credit scores range from about 300 (worst) to 850 (best). Although it varies a bit by credit reporting company, a score between 300 and 600 is typically considered bad, between 601 and 669 is fair, between 670 and 739 is good, and anything over 740 is great. Having a bad credit score (or having no credit score at all) will limit your access to loans, and could increase how much you pay for insurance. Additionally, the loans you do qualify for will likely have higher interest rates than those offered to individuals with a higher credit score. On the other hand, having a good credit score means that you can qualify for just about any credit card that you want (especially those with better rewards, like cash back) and you’ll get lower interest rates on car loans and mortgages. The problem is, you don’t get a credit score until you start using credit.
You might be thinking “Well, I don’t have anything bad on my credit report, so I should be fine!” But what a lot of people don’t realize when it comes to credit is that good things are important too. Banks and lenders don’t look at an empty credit history and see it as a positive. Instead, someone with no history is a big gamble to a lender—they don’t have any previous data by which to judge whether you’re likely to pay back what you owe.
So, really you should start building your credit well before you really need it for anything. The easiest time to start building credit is in college! Below are tips and resources for successfully building your credit.
1. Open a credit card account. You may choose to accept an offer you receive in the mail, look for a card online, or apply for a card through your bank. Note that while many cards require a certain credit score to qualify, banks often offer ‘student’ credit cards that have lower requirements. These cards typically have a low credit limit (how much money you have available to spend on the card), but you don’t have to have previous credit history to get one. Here are some examples of credit cards available to students.
2. Buy things with your credit card regularly, but pay the entire balance every month. The best advice I have is to use your credit card to buy things you would usually put on your debit card or pay for with cash. Making large purchases that you can’t really afford will hurt you and your credit in the long run. Plus, anything that doesn’t get paid off on your statement gets charged interest—usually 20-25%! Are the $5 coffees that you don’t need but buy every day out of habit really worth it if you can’t pay for them all at the end of the month? Probably not. Even though money spent on credit cards doesn’t come out of your account right away, treat it like it does.
3. Don’t put any really large purchases on there just yet. One of the most important factors in your credit score is your credit utilization. In other words, what percentage of your available credit are you using at any given time? Ideally, less than 30%. So if you only have one credit card, and the limit is $1,000, putting over $300 on it may hurt your score. This is because lenders worry that you may not be able to pay off everything you’re putting on the card.
4. Remember to make the payment! Many cards have an automatic payment feature where you can set your bank account up to automatically pay the balance every month. There’s also the good old fashioned mailing-in-the-check way. Take it from personal experience, whatever you do, make sure you make the payment by the due date. One time, I made a purchase with a card I rarely used. It was a whopping $40. And I completely forgot about it until a few months later, when I got a call from the card company wondering why my payment was more than a month late. I completely forgot that the card didn’t have an automatic payment option, and never set up a payment. Needless to say, I now have a “no cards without automatic payment options” rule. Do whatever works for you...just make that payment!
5. Monitor your credit score. Each month that you make a payment, your credit score will improve. There are many free sites available to monitor your credit regularly; my favorite is CreditKarma. Monitoring your score also has the added benefit of alerting you quickly to incorrect or fraudulent information. Fraud can come in the form of someone opening up a new account in your name, or simply using your current accounts to buy things you didn’t authorize. Obviously, someone fraudulently using your information probably doesn’t plan on paying off those bills. If not caught quickly, all of those unpaid purchases can have a very negative impact on your score. By monitoring your credit, you’ll see any new accounts that are added to your report, as well as the balances of your current accounts. And no, checking your own credit will NOT affect your score! When other people check your score (banks or lenders) it does have an effect, but more on that below.
6. When you apply for a new card or loan, lenders check your credit, which affects your score. This ensures that you’re not constantly opening up new accounts. Your score will typically rebound in a few months. Note that, when shopping for a new car, if you go to multiple dealerships they will each run their own report on your credit. However these are typically lumped together as one group of inquiries, meaning you don’t need to stress that you’re hurting your credit score by shopping around. The same goes for student loans and mortgages, as long as the inquiries are all made around the same time.
The Federal Trade Commission (FTC) also has some great resources about credit, including an entire section dedicated to Credit and Loans. Subtopics include budgeting, how to dispute errors on your credit report, and information on credit card scams. I like resources like the FTC best, because there’s usually no hidden agenda to sell you anything. Websites like Experian, CreditKarma, and NerdWallet can also be useful, although they sometimes include advertisements. Now that you’re prepared to manage your credit wisely, go out and make good credit choices!