Credit Score Basics for Young Adults
When you take out that college loan or receive your first credit card, you’re on your way toward building credit. How responsibly you manage that credit will determine whether it’s good or bad. Good credit means you’ll be looked upon more favorably by lenders for loans, which can get you the best interest rates on car loans or mortgages ó saving you money in the long run. Bad credit, however, could mean higher rates or getting denied a loan altogether. Credit score ratings aren’t just important when applying for loans, either. Your credit history may also be considered when you apply for an apartment, job, or insurance policy, notes the Federal Deposit Insurance Corporation (FDIC), so your credit score could mean the difference between landing a job ó or not.
Luckily, there’s no mystery or magic to starting your credit report on the right foot and developing good habits from the start. Follow these credit score tips, and you’ll be well on your way toward building ó and maintaining ó the best credit score possible. Your future self will thank you for it.
Check your credit report.
This one’s pretty obvious ó to manage your credit score, you need to know what it is first. But, according to a recent survey from Harris Interactive, 60% of young adults (ages 18-34) do not know what their credit score is. Finding out is easy. You can get it for free through a 10-day trial with MyFICO, the consumer information website for the Fair Isaac Corporation, which developed the scoring model for FICO, the most commonly used credit score by lenders. You can also request a free credit report each year from each of the big three credit bureaus ó Experian, TransUnion, and Equifax ó through AnnualCreditReport.com. The FDIC recommends doing this annually to check for any errors, such as with late payments or how much is owed for each credit account, which could negatively affect your credit score, as well as any activity that might indicate you’re the victim of identity theft.
Pay your bills on time.
Paying all bills and debts on time is one of the best ways to build and maintain a good credit score, notes the FDIC. That’s because payment history is generally the most heavily weighted data used on your credit report to calculate your credit score. The FDIC recommends paying off your bills in full each month consistently on time, or, barring that, the minimum. You can set reminders through your bank via text message or email or use money-management tools like Mint.com to stay on top of your payment deadlines.
Don’t abuse your credit limit.
You may be paying your bills on time each month, but if your credit card balance nears your credit limit, you aren’t doing yourself any favors. Lenders look more favorably on those who use credit responsibility and whose ratio of balances to credit limits is low. So only use your card as needed to maintain this ratio of low credit usage.
Don’t open too many credit lines at once.
It may be tempting to apply for every credit card offer you come across to take advantage of the sign-up deal or a discount at a retail store. And while several lines of credit can help your credit score, it won’t if you open a lot of new accounts too rapidly, advises MyFICO. New credit accounts will lower your average account age, which can negatively affect your score when you don’t have a lot of other credit information ó which is likely the case when you’re a young adult. Opening several credit lines at once can also look risky to a lender if you’re a new credit user. So apply for new credit accounts as needed, over time.
Build credit ó and use it.
If you apply for that new credit card and never use it, you’re not doing yourself any favors. You need to use credit to affect your credit score, so if you don’t keep your accounts active, you can’t build toward a good credit score. The longer you have active credit accounts, the more positively that affects your credit score, too. A good rule of thumb is to use your credit card about every six months, if you’re not using it on a regular basis. The key, of course, is to manage your credit responsibility.
Fixing a Bad Credit Score
You received your credit score, and it’s, well, bad. Maybe you had one too many late payments, went over your credit limit, or, in an extreme case, had to declare bankruptcy. Despite the reasons, your credit score is not as high as you’d like it to be. The good news is, a bad credit score not a death sentence. Just as your financial actions can lower your score, they can also bring it up. And since most credit scoring systems place more emphasis on recently reported information rather than older, your bad credit will mean less and less over time.
What it exactly takes to improve your credit score will vary from credit scoring system to credit scoring system, based on the lender, creditor, and types of credit and insurance. But generally, the following steps can help improve your credit score. Which tips you should follow will also depend on why you have a bad credit score in the first place, so make sure you talk to a professional, such as a consumer credit counselor, for credit score help if you’re not sure what to do.
Check That Your Credit Report Is Accurate
Fixing a bad credit score may be as simple as reporting an error. MyFICO, the consumer information website of the Fair Isaac Corporation, recommends requesting your credit report to check for errors that may be negatively affecting your credit score. For instance, make sure there aren’t any late payments listed incorrectly on an account, and that amounts owed for each open account are correct. If you do find any errors, the Federal Trade Commission (FTC) details how to report errors. Sites like MyFICO.com also provide a summary of factors that are both negatively and positively affecting your credit, so another benefit of requesting your report is that you can see where you need to improve.
Pay Your Bills on Time
Your payment history is the most heavily weighted data on your credit report used to calculate your credit score, so it’s a natural place to start to improve your score. Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO score, so by making sure you pay your bills on time, you can improve your score going forward. According to MyFICO, with time, as more recent good payments show up on your credit report, the impact of past credit problems fade. To help stay on top of payments, you can set up automatic payments from your checking account, or text and email reminders of payment due dates through your bank.
Bring Down Your Debt
The amount of debt you’re carrying is the second most heavily weighted item used to determine your credit score. If the amount you owe is close to or over your credit limit, that’s likely to have a negative effect on your score, notes the FTC. Getting your debt well below the credit limit therefore may help bring your credit rating up. For starters, you should stop using your credit cards altogether so your debt doesn’t increase, and then work to pay off your debt.
Get a New Card
Sometimes, re-establishing your credit history can help improve your credit score, notes MyFICO. Opening a new credit account and paying it off in full on time each month may help raise your score in the long term ó but the key is to manage it responsibly.
Avoid New Credit
At the same time, it may be in your best interest to avoid new credit altogether. Too many credit card accounts can have a negative effect on your score, notes the FTC, as it can appear risky to a lender. Instead, only apply for credit as needed.
A mix of credit cards and loans could improve your score, as many credit-scoring models consider the type and number of credit accounts you have, notes the Federal Reserve. Also keep in mind, however, that opening many credit accounts at once can be damaging for your credit score.
Beware of Credit-Repair Scams
It takes time and patience to fix a bad credit score, so if you see any type of service that promises to erase your bankruptcies, judgments, or liens, or guarantees a loan, it should raise red flags. Two scams to avoid are advance-fee loan scams and credit repair scams, warns the FTC. Ads promising debt relief may really be offering bankruptcy, while advance-fee loans that guarantee that applicants will get the credit they want ó after paying an up-front fee ó are likely illegal, as legitimate creditors can’t guarantee in advance that you’ll get a loan. “Only time, a deliberate effort, and a plan to repay your bills will improve your credit as it’s detailed in your credit report,” advises the FTC.
Maintaining Your Credit Score
After years of responsibly managing your credit, you’re rewarded with a good credit score. What that number is will vary by lender, though USA.gov notes that a FICO score in the 700s and higher will put you in good standing. At that level, you can enjoy low interest rates, high credit limits, and are likely to be approved for credit card and loan applications.
Once you’ve reached a point where you want to maintain your credit score, or even bring it higher, there are several things you should keep in mind to stay favorable with lenders:
Check Your Report
If you have a good credit score, that doesn’t mean you should stop monitoring it. It’s important to regularly check it throughout the year for any inaccuracies or signs of identity fraud. You can request a free credit report each year from the three main credit bureaus ó TransUnion, Experian, and Equifax. In addition, sites like MyFico.com, the consumer information website of the Fair Isaac Corporation, also provides a credit report summary of factors that are positively and negatively affecting your credit, so you can know what to keep doing to maintain your score, and where to improve to bring it even higher.
Know Your Credit Scoring Models
The majority of lenders use your FICO score, but it’s not the only credit scoring model out there. Some may use newer scoring models, like the credit reporting company’s VantageScore, or a scoring model of their own. It can be confusing, so to know exactly where you stand, Privacy Rights Clearinghouse recommends asking your lender what scoring model it uses. You can also check your credit score with each of the three credit reporting companies to know where you stand in case a lender or company looks there. It’s not a free service, but if you don’t want to pay, you can still request your report for free and check your data to ensure your credit score is at least accurate.
Make Payments On Time
Payment history comprises the bulk of your credit score compared to other data on your credit report. Chances are, you’re already making credit card and loan payments online consistently, but it’s important to maintain this practice, as even being only a few days late can have a negative impact on your FICO score.
Don’t Rack Up Debt
Another major component of your credit score is amounts owed ó essentially, any balance on your accounts. Not owing a lot and staying well within your credit limit helps to maintain or improve your credit score. Even if you charge close to your limit and pay off your card in full each month, lenders may see a reliance on credit a risk and that could negatively affect your score. A good credit balance to limit ratio to maintain is under 30%, note experts on CNN Money. In other words, if your credit limit is $1,000, you shouldn’t charge more than $300 a month.
Don’t Move Your Debt Around
It may be tempting to consolidate your debt onto one card to make for easy payments, but this may negatively affect your score. MyFico.com notes that owing the same amount but having fewer open accounts may lower your score.
Keep Credit Open
If you pay off an old credit card, don’t close the account. Another factor used to determine your credit score is the length of credit history. The longer the credit history, the better, but if you close an old account, that would shorten the life of your credit history. It’s also important to use your credit cards, even frequently, as recent use can help your credit score.