You’re out on your own for the first time. Just as you’re getting used to running your own budget, you check the mail. Staring back at you are credit card applications, mailers from mortgage lenders, and, for good measure, some car dealership ads that promise “no credit needed.”
Much as you want to get a new car, don’t believe the dealer’s ad: You’ll need credit for practically all of life’s big purchases. And unless you’re willing to pay a sky-high interest rate, you’ll want a good or excellent credit score.
The question is, how do you go from no credit score to a stellar one? This “101” guide can help, starting with that all-important number: your credit rating.
What Is a Credit Rating, and Why Is it Important?
Your credit rating is a score commercial banks, lenders, and others use to determine your financial trustworthiness. In short, it suggests how likely you are to pay them back as promised.
The higher your credit rating, the more likely you are to be approved for a loan or credit card. If your score is low, tools like secured credit cards can help you get it up to snuff.
The three credit reporting agencies are Equifax, TransUnion, and Experian. Collectively, their assessment of your creditworthiness is used to calculate your Fair Isaac Corporation (FICO) score.
What Is Your FICO Score?
Your FICO score is a number between 300 and 850. It represents the amount of risk a lender assumes when loaning you money.
Your landlord may use your FICO score to determine how likely you are to default on rent. If you’re applying for a finance role, the potential employer might use it to decide whether or not to trust you with the company’s books.
When you are just starting, you may be told you don’t have a credit score. There is no numerical number associated with “no credit score.”
Your FICO score is a compilation of five categories:
- Payment History
Your payment history represents 35% of your credit score. Paying bills more than 30 days late — or, worse, not at all — will tank your credit score.
- Utilization Rate
Your credit utilization rate is the amount of money you currently owe divided by your total credit line. If you have a $2,000 credit card balance at a $5,000 limit, for instance, your utilization rate is 40%. Unless your utilization rate is consistently under 30%, your score may suffer. Utilization rate represents 30% of your credit score.
- Length of Credit History
The longer you’ve had credit accounts open, the better your score will be. The length of your credit history is worth 15% of your score.
Because your oldest credit cards have the greatest bearing on this ranking factor, leave them open if you don’t carry a balance on them. If you need to close a card, choose your newest.
- New Credit Requests
Ten percent of your score is based on the number of new accounts you’ve tried to open recently. Triggering too many credit inquiries in too short of a time period makes lenders worry about your appetite for debt.
FICO only considers inquiries from the last 12 months in your score, although inquiries will show on the credit report for 24 months. Requesting a copy of your own credit report will not impact your score.
- Credit Mix
The final 10% of your score is based on the mix of credit you carry. Student loans, car loans, and mortgages are viewed by lenders as less risky than credit cards and personal loans.
While your credit mix and recent inquiries matter, they shouldn’t be your focus. Simply making payments on time and in full will have three times the impact of each of the last two factors.
What Is a Good Credit Score?
Younger adults and others with shorter credit histories tend to have lower credit scores. Because it takes time to build good financial habits, older consumers tend to have better scores.
Regardless of your age, strive for a “good” score or higher. FICO scores between 670-739 are considered “good.” Scores between 740-799 are classified as “very good.” Scores above 800 are considered “exceptional.”
To achieve a score above 670, or to improve a score below that, focus on the factors above. Keep reading for some tips and tricks.
Hidden Tricks to Building Credit
Here are a couple of bonus ideas to help you build credit when you are just starting out.
- Become an Authorized User
Ask a trusted family member with good credit whether you can be an authorized user on their card. As the primary cardholder, they’ll be on the one ultimately responsible for the bill. Their activity, however, will build up your credit history.
- Apply for a Secured Credit Card
Traditional credit cards are unsecured, meaning they do not require the applicant to put up collateral in case of default. Some banks offer secured cards to people with poor or no credit as a way of reducing their risk without outright denying the application.
- Request a Limit Increase
Another way you can increase your credit score is to request an increase to your credit limit. As long as you pay more than you charge, this will decrease your credit utilization rate. Remember, your utilization rate is responsible for almost a third of your total score.
- Request Rent and Utilities Be Included in Your Report
Credit reporting agencies may — but are not required to — include your rent, phone, and utility payment histories in your report. If you’re responsible with those bills, go ahead and ask your service providers to report your payments.
Beware that you may need to pay extra for this. Although individual credit bureaus allow you to adjust your payment reporting preferences, you’ll need to enlist a third-party service to report them to all three bureaus.
Good credit is a treasure, but one you must use wisely to keep. Lose it, and you’ll pay more each time you need access to money other than your own. It doesn’t get much more “101” than that.