Creating a Credit History from Scratch!
Having a solid financial foundation can give you the leg up needed to make the most of the many possibilities that come with making the transition to adulthood.
Some of the most critical choices we make in life, such as where to live, how much we pay for rent, and even whether or not we land the job we want, depend heavily on the state of our credit.
The earlier you begin, the better off you will be. In fact, the youngest you can start to build credit is at age 18! Just when you are either graduating high school or taking your first steps in college.
Building credit takes time, patience, and most importantly, the wisdom to build it correctly, which this article aims to help you achieve.
The best time to build credit is now!
Getting a head start on your finances is essential, as it takes time and will be a significant factor in your adult life going forward, as noted above. Your ability to establish and use your own credit to pay for essentials like housing, transportation, and a variety of other necessities is a surefire indicator that you are doing things right. Which loans or credit cards you qualify for and at what interest rates you pay depends heavily on your credit history.
Is there a difference between no credit and bad credit?
You've certainly learned by now from your parents and friends that having a low credit score due to things like missing payments, defaulting on a loan, or even filing for bankruptcy can and will end up costing you more in the long run whenever you apply for a new card or loan.
On the other side, having no credit history doesn’t hurt you but it doesn’t help you either; it will make it very difficult for you to get accepted into whatever you apply for and have to find other means of payment or rely on the credit of the people you know to help out.
If this is your first time dealing with credit, you can do a few things to start on the right foot!
- When someone you know and trust with good credit allows you to into their account, it means they are willing to let you use their card. This typically occurs between parents and teens since it calls for trust and accountability on both sides.
- Obtain a secured credit card.
- A secured credit card requires a security deposit to be held as collateral. The limit on your card is often equal to the amount you deposit (e.g., a $1000 deposit results in a $1000 limit).
- Once you’ve established enough credit history, you can transition to an unsecured credit card that does not require collateral and relies solely on your credit rating and other factors. They come with the bonus of having lower interest and earns you rewards by paying on time.
- If you’ve let enough time pass, six months or more, it would be good to get a second card; the credit you have available to you will increase and help lower your credit utilization score if you maintain your debts low. Financial experts agree that keeping your credit usage at 30% or lower is ideal for maintaining a high credit score. It shows you keep your debts manageable.
- Use a credit builder loan if you don’t want a card
- This type of loan works by first paying back the amount you borrow in full before you can use the funds. It's an excellent way to diversify your portfolio.
The advantages of having a solid credit history!
After establishing a track record of good financial management, you may be eligible for a larger credit limit and more benefits.
Here's how to do it:
- Keeping up with timely debt payments
- Set up automatic payments to take the hassle out of it if you prefer
- Make wise investments you know you can pay back and not buy above your means
- Having a good Debt-to-income ratio is vital for raising your score
- Don’t open several credit cards in rapid succession; it will have a negative impact
Lenders will recognize your careful borrowing and smart use of credit with increased credit limits and cheaper interest rates on loans if you do any of these steps.
And if your score is good enough, you may be able to use it as bargaining leverage to obtain a better deal on a new home or vehicle, spending just what you can afford. That's what we call value for money!
What is measured in your credit score?
According to myFICO, their credit score system uses five factors to determine your score, which includes:
- Your Payment History: 35%
- Amounts Owed (Credit Utilization): 30%
- Credit History Length: 15%
- Credit Mix: 10%
- New Credit (Inquiries): 10%
As you can see, both your payment history and credit utilization make up the most considerable portion (65%) of determining your credit score. Make sure that you are paying your bills on time and not allowing yourself to rack up a lot of debt.
For your credit history length, it is a good idea not to close your oldest credit card as your history is determined by the age of your oldest and youngest accounts and the average age of each account.
While you can build credit with just credit cards, diversifying the types of credit accounts you have can help give you a good credit mix that can give your score an extra nudge in the right direction.
Lastly, Each time you open a line of credit or have your credit checked when applying for loans. Each hard inquiry every lender or company does to check your credit will have an impact.
Having good credit is probably the single most important thing to have; it is tied to many of the essential services, items, and places we need to access to live comfortably. The news we read online and the stories shared by people we know can make credit building sound intimidating and risky but take into account your own situation and circumstances. If you know you are a responsible person, then you should have no problem.
This article was provided by the good folks at Money.com.