Do you want to learn how to build credit?
While you might be intimidated, it doesn’t have to be hard!
I learned how to build credit at 18 by opening a credit card offer that came in the mail. My first credit card had a small limit around $300.
I never maxed it out, and there were really no benefits. But, it didn’t have a monthly fee, and it helped me learn how to build credit.
My credit score is now over 800 and considered excellent.
I don't rely on my credit score and credit history, but I know that it impacts my life in many different areas — from insurance, to loans, to my cell phone bill.
Whether you want to believe it or not, your credit score can play a major role in your family's life.
While you shouldn't go crazy and completely obsess over learning how to improve your credit score, it is important to learn what you can about your credit score and the impact it may have on your life.
Your credit score can influence the interest rate you receive on a loan or your home mortgage, finding a rental home, attaining certain jobs, your insurance rates, and more.
Because of this, I think that a credit score can be used to a person’s advantage.
Even though your credit score can impact your life in a big way, that doesn't mean it's hard to build your credit history and credit score. Yes, it can be easy to wreck your score, but it’s easy to learn how to build your credit score back up.
Everything you need to know about how to build credit.
What is a credit score?
Before we begin, I want to talk more about what a credit score is. If you want to learn how to build a credit score from scratch, then starting here is the key to understanding what you’re working with.
A credit score is a three digit number that shows others your creditworthiness, and is often used as an indicator to show how risky you are.
There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, so your history and score may be slightly different at each of them.
What is a good credit score?
Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is.
In general, though, a good credit score is usually 720+. The higher your number, the better your credit score.
Is it easy to hurt your credit history?
Learning how to build credit and improving your credit score usually take more work and time than it does to damage your credit score.
You may be hurting your credit score if:
- You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate, as it shows that you are not maxing out your debt.
- You cancel credit cards that may be helping your credit history.
- You pay your bills late or not at all.
- You never check your credit report and have errors listed.
Can my credit score influence my home buying process?
Yes, for sure!
This is a big reason why learning how to build credit is so important. Your credit score can impact:
- Whether or not you are approved for a home loan.
- Your interest rate.
- How large of a home loan you are given.
- The size of the down payment you are required to put down.
Read more at How Your Credit Score Impacts Your Home Buying Process.
Why is improving your credit score important? What else can it affect?
There are many instances in which your credit score and/or credit report may be looked at, and sometimes it has nothing to do with a loan. This is why it is important to work on building your credit score, because you never know when you may need it.
Plus, it's something you can personally control, so why not learn how to build credit and start working on improving it?
Home and car insurance – If you have homeowners or car insurance, your rate may be calculated on a factor you didn’t know about – your credit score. If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.
Employer – This may be shocking to hear, but there are some employers out there that will check your credit report (with your permission). Industries that often check your credit report include those dealing with financial services, chemicals, and defense. I recently read a statistic that around 30% of companies will check a potential new hire's credit report before making a hiring decision.
Renting a home – If you have decided you don’t want to own a home, you may still need your credit history checked. In fact, your landlord will most likely check your credit history. They will want to know if you pay your bills on time or if you have ever skipped a payment entirely. This will say a lot about you as a renter, whether you want to believe it or not. If your credit history is not up to their standards, you may be denied the rental altogether, you may be asked to pay multiple months rent upfront, or you may be asked to find a co-signer just in case you fail to pay your rent.
Credit cards – If you don’t care about credit, then you probably will not care about this one. However, if you want a credit card, especially one with a good rewards system in place, then you will want to work on improving your credit score. The credit cards with the best reward offers are usually only available to those with good or excellent credit scores.
Loans (home, car, etc.) – If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history so they don’t end up losing money on your loan.
The interest rate you receive – A good credit score usually means you will qualify for lower interest rates, while a bad credit score means higher interest rates. I have talked to someone with a 24% interest rate on a car loan, all because they had a very low credit score. A higher interest rate means paying hundreds or thousands of dollars extra in interest, and this is why it’s so important to learn how to build credit
What makes up your credit score?
There are five categories that make up your credit score. Your payment history and amounts owed equate to 65% of your credit history, but don't forget the others factors!
If you want to work on building your credit score, here are the following factors that go into your score:
- 35% Payment History. Your payment history has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
- 30% Amounts Owed. This is the next largest category when it comes to your credit score. This includes your balances, your utilization rate, and more.
- 15% Length of Credit History. The age of your accounts come into play here. This is why it's usually a good idea to keep a credit card that you've had for a long time. I still have the credit card I opened when I was 18. It has no other rewards than improving my average account age. However, only keep cards open if you know you won't go into debt.
- 10% New Credit. This category includes things such as how many hard credit inquiries you have and how long it's been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report.
- 10% Credit Mix. This includes the type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, and so on.
Here’s how to build credit from scratch:
After reading all of the above, I'm sure you're wondering how you can build your credit score, especially if you have a low credit score or no credit at all.
Increasing your score and learning how to establish credit is not extremely difficult. Once you realize what impacts your credit score, you can make relatively easy changes that will begin to improve it.
Below are my general tips for building your credit score.
Get a credit card.
Okay, okay, some of you may be cringing at this tip. Credit cards are not for everyone, BUT if you know that you can be smart about it, opening a credit card is a way to build your credit history. It can one day lead to you being able to use your credit score and credit history to your advantage.
While your first credit card will probably have a low limit and a high interest rate, it can help you learn how to build credit.
If you are looking for options, click on this link and then click on the Limited/No Credit link on the left hand side. Make sure you read all of the fine print before deciding to apply.
And, I recommend reading Top 5 Credit Card Mistakes And How To Avoid Them before you get a credit card.
Pay your bills on time.
According to FICO, 35% of your credit score is determined by your payment history. One or two late payments most likely won't prevent you from having a good credit score. However, continuing to miss payments most likely will.
No matter what the bill is, you should always pay it on time. Paying a bill late may lead to interest charges, late fees, and a drop in your credit score.
Yes, companies can report late payments to credit agencies. If you do happen to accidentally pay a bill late, do not panic, though. If you are quick enough, you can call the company and ask for some leniency so they won’t report it.
I once underpaid my monthly mortgage payment by $10. I must have clicked the wrong number because I'm still not even sure how that happened. Luckily, I caught it quickly enough and my mortgage company realized that it must have been a mistake. They waived any late fees and also did not report it to anyone.
Other related tip on how to build your credit score from scratch: Pay your credit card bill before your balance is reported. Even if you pay your credit cards in full each month, your balances are still probably being reported. Some people avoid this by paying their credit card bills twice a month to keep their utilization rate low.
Regularly check your credit report.
It’s important to check your credit report regularly because it may include errors that negatively affect your credit score. The sooner you fix those errors, the sooner you can improve your score.
My favorite site for checking my credit score is Credit Sesame. Credit Sesame makes it extremely easy to check your score and both me and my husband have active accounts.
You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing them out so you can get one every four months. You can read more about this here.
Keep your balances and utilization rate low.
If you have a credit card, then you have a credit limit. However, just because you are given this limit doesn't mean you should try to reach it.
I recommend spending less than 20% of your available credit.
In fact, you should always try to be below 30% of your credit limit if you want to have a good credit score. So, if your credit limit is $1,000, you do not want to spend more than $300. Any more than that will impact your credit score.
It's also important to note that even if you are paying your balance in full each month that going over 30% of your credit limit can still negatively impact you. This is because your balance is reported on a monthly basis to the credit bureaus. In this case, it is best to pay off your balance or at least some of it before your next credit card statement goes live. Paying off all or a portion of your balance before the rest of it is due will keep your utilization rate low.
If your credit limit is low, then you may even want to request an increase. Of course, only do this if you trust yourself not to spend more. The key here is to not it all!
Be mindful of your credit history.
Keeping credit cards open can lengthen your credit history, and this can improve your credit score. However, only do this if it makes sense for you. If you think you will go into debt or if the annual feels aren’t worth it, then you may want to think about closing your cards instead.
According to FICO, 15% of your credit score is from the length of your credit history. The longer your credit history then the higher your score may be.
If you want to learn how to build credit and you have old credit cards that carry no annual fees, you may want to think twice before you cancel them. Yes, closing them can help you simplify your life, but an old credit card may be lengthening your credit history and, therefore, improving your credit score.
Like I said, I still have the credit card I opened when I turned 18. The credit card stinks and pretty much offers no benefits. However, it's the card I've had the longest. To keep it active, I just buy one thing a year (such as gum)!
Side note: There are many reasons why you may want to cancel your credit cards, though. If having credit cards leads to credit card debt (not being able to pay your balance in full every month), then it may be the best idea to cancel them.
In the end, learning how to build credit is easy and has lots of benefits.
As a personal finance blogger, I sometimes hear people say that you shouldn’t worry about your credit score because credit cards are horrible. However, I don’t completely agree with that.
Credit cards are dangerous for some people, but that’s not the case for everyone.
Learning how to start building credit and improving your score can end up saving you lots of money. It can lead to lower interest rates, lower down payments, and lead to more opportunities.
Having a good credit score doesn’t mean you use credit cards all of the time either, it means you’ve followed the tips in this article and have shown lenders, employers, and others that they can trust you.
Do you know what your credit score is? Do you think learning how to build credit is important?
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