Having “good” credit sounds like something you don’t really need to be concerned with until you’re ready to pony up a down payment on a home or need a second car to accommodate your growing family (hello, minivan!).
But the truth is, your credit can help determine whether you can even get a mortgage or car loan in the first place. It’s something you have to nurture from the time you start paying your own bills so that when a money goal is finally in your grasp, your credit won’t be what holds you back.
Fortunately, the need for healthy credit isn’t lost on the younger generation: 66% of people in the 25-to-29 age range who responded to "a" March 2016 LearnVest/Barclaycard Financial Literacy Research survey said that having a strong credit rating was extremely important to them. That’s higher than any other age range and the 59% reported by the population at large.
So whether you’ve got no credit history to speak of or just need to start building a better one, we’ve gathered some tips from credit pros to help you gain—and then maintain—a credit rating you can be proud of.
Whenever you apply for a loan or credit card or try to set up a cell phone bill or utility service, it’s likely the company will take a look at your FICO® Score, the most commonly used score by lenders. A FICO Score ranges from 300 to 850. Although the range for what’s considered “good” can vary, generally speaking, a good score is between 700 to 749, and a score of 750 or higher is typically considered excellent, says Beverly Harzog, author of “The Debt Escape Plan.”
Five things in particular impact your FICO Score in varying degrees of importance: how much you owe, your payment history, the length of your credit history, the mix of types of credit you have and how much new credit you’ve opened up recently. Knowing these factors means you also know what can help or hurt your score overall.
The longer you can demonstrate you’ve been able to handle credit responsibly, the more attractive you will appear to lenders. “You could have excellent income and money in the bank but still have a low credit score if there isn’t enough evidence showing how you handle credit,” says consumer credit advocate Gerri Detweiler.
One way to build credit if you have none or are having a hard time getting approved for it is to be added as an authorized user or co-signer to a partner or relative’s existing credit card. However, the original card owner would ultimately be responsible for your charges, so it’s imperative you both are on the same page when it comes to parameters for how you would use and help pay for the card.
Getting a secured card is also an option. With a secured card, you provide a deposit upfront, and the credit-card company extends you a line of credit generally equivalent to the deposit, though some may offer you a higher limit. By making purchases and paying your bills on time each month, you’ll be demonstrating that you can handle credit responsibly, which in turn helps establish a positive credit history. A strong credit performance could eventually help you graduate to an unsecured credit card (the most common type of credit card, which doesn’t require collateral upfront).
If you do use a secured credit card, however, confirm with the card issuer that it actually reports to all three major credit bureaus (TransUnion, Equifax and Experian) so that your efforts don’t go unnoticed, Harzog says.
Once you’ve been approved for loans or credit cards, one of the best ways to maintain your credit rating is to have “no missed payments, ever,” says John Ulzheimer, credit pro and author of “The Smart Consumer’s Guide to Good Credit.” Your payment history, after all, is the most heavily weighted factor in your FICO Score, making up 35%.
And it’s important to realize that it’s not just lenders that report to credit bureaus; things like medical debt and missed utility payments can also ding your credit report. “If you forgot to pay your electric bill, that could be passed onto a debt-collection agency, and they could report it,” says Harzog.
The amount you owe across your credit accounts is the second-largest factor in your FICO Score, at 30%. And a big influence on this calculation is your credit utilization ratio, or the percentage of your available credit that you’re actually using. So making sure your balances don’t balloon can go a long way toward helping maintain a good credit rating.
The general rule of thumb is that you shouldn’t exceed a credit utilization ratio of 25%, “but it varies depending on your credit history, so there’s no one-size-fits-all ratio,” Detweiler says. However, if you’re looking to help maximize your score, Ulzheimer advises keeping your ratio below 10%.
When you apply for a credit card or loan it triggers a “hard inquiry” on your credit report (a type of inquiry in which a company is assessing you because you’ve applied for credit with them), which dings your credit score. Not only that, opening several lines of credit within a short period of time could make lenders perceive you as a credit risk—plus, it shortens the average age of your credit history, Detweiler says.
On the flip side, closing credit accounts you already have can have a similar negative impact on your length of credit history. So even if you don’t use a card often, keep it open anyway and try to charge some small things on it every once in a while because “if it’s not active for three or four months, the credit card issuer might close it for you,” Harzog cautions.
If you don’t know what’s in your credit report, then you don’t know what’s affecting your credit score or how you appear to potential lenders. So take advantage of the fact that you are allowed a free copy of your credit report from each of the three major credit bureaus every 12 months. (You can get them at annualcreditreport.com.)
Since these reports can vary, Detweiler recommends reviewing all three even when you’re just starting to build your credit so you know whether reporting errors or identity theft is tarnishing your records. “There’s no harm in checking your credit reports; it doesn’t hurt your score,” she says. “And if you don’t have any information reported yet, the bureaus will tell you that.”
Remember that your credit score is calculated based on what information appears in your report—and you can’t fix what you don’t know about. “The credit report is the sole and complete basis for your credit score,” Ulzheimer says. “If you build a solid credit report, then the score will follow.”
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LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Unless specifically identified as such, the individuals interviewed or otherwise listed in this piece are neither clients, employees nor affiliates of LearnVest Planning Services and the views expressed are their own. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.
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