*Disclosure: This article is general education, not legal or financial advice. Credit repair can't remove accurate, timely information, results vary by file, and you can dispute errors with the credit bureaus yourself at no cost.*
Starting your credit journey early and on the right footing is vital for the future of your finances. There are many ways to position yourself successfully in the world of credit, and understanding the intricacies of credit building and learning healthy spending habits will help put you in the right direction towards financial success. Understanding how the three major credit bureaus calculate our credit scores is very important so you know how certain credit usage can boost your creditworthiness and overall score. This article helps you understand the strategies for achieving higher credit benchmarks, and bring about a positive change in your financial life.
Credit is such a vital part of our lives, but many Americans report having issues with their scores, and simply not understanding the dynamics of the world of credit. Statistics show that about 11% of Americans have a credit score below the national FICO average, which significantly affects their financial health and well being in the long run.
This is why credit education is so important in our society, and so overlooked. In order to understand how credit works, we need to understand what comprises our credit scores, and what effect each factor has in overall credit health. The following are the five main points that affect your FICO score:
- Your history of making on time payments: This constitutes 35% of your credit score, and is referring to whether you pay your credit card balances on time, and in full or not. Creditors place a big importance on your payment habits, and are likely to approve/deny your application based on this factor ALONE!
- Credit Utilization: Credit Utilization is the amount of credit you use month to month. This comprises 30% of your total credit score, and is calculated as the amount you owe, divided by your total credit limit. For example, if you are spending $2,000 on a credit card with a total limit of $5,000, your credit utilization is 40% (Considered high). As a general rule of thumb, try to use below 30% of your TOTAL credit limit, ideally below 20%! This shows creditors that you are less reliant upon borrowed money, and gives them more avenues to do business with you.
- Length of Credit/Credit History: Each of the three main credit bureaus, Experian, Transunion and Equifax, show your oldest as well as newest accounts on your report. This is no coincidence, as these credit bureaus pay a great deal of attention to your history of opening tradelines. How long you have had each of your cards makes up about 15% of your credit score. This is why it is great to have older, positive accounts showing on the report, as they help boost your credit worthiness
- New Accounts/Inquiries: Just as old accounts matter on your report, having too many new accounts/inquiries associated with new accounts can bring down your score. It is vital to space out applications for credit, and be mindful of the hard inquiries that appear on your report every time you apply for a new tradeline. New accounts comprise 10% of your credit score. The good news is, inquiries are supposed to automatically fall off of your report after 2 years. So, if you still have inquiries older than two years reporting on your score, or even inaccurate inquiries, The Credit Lion is here to help you remove these obsolete items!
- Diversify your credit report! The ideal situation is to have a plethora of different types of credit: credit cards, mortgages/auto loans, personal/student loans, etc. This part of your report defines another 10% of your score, therefore do not overlook the diversity of your accounts.
How to Start Building Your Credit Early?
As a first-time customer applying for a credit card, it can seem like an impossible task to get the credit card you desire, and navigating the world of credit can be scary at times. However, there are many ways to start off with healthy credit!
- Ask to be added to a family member's credit card as an AUTHORIZED USER. This will bring the credit history of the experienced family member into your own credit report and will help establish a great starting ground for your future credit applications.
- Start by applying for secured cards. This is similar to a debit card, as you will only be able to use your own money that you deposit into the card. However, the card will be reflected on your credit score, along with the payment history. This is a great way to start off your credit journey without the risk of falling in debt, as you will only be able to spend the money that you have!
- Consider store credit cards. The requirements for opening a department store card are usually slightly lower as compared to traditional banking accounts. Take advantage of this opportunity to show creditors you are worthy of credit.
- Student Loans. For younger customers looking for new credit lines, your student loan activity is also reflected on your credit report and ultimately affects your score. Therefore, taking on student loans shows you can be held responsible and puts you in a good light with the creditors.
No matter what happens, remember not to spend more than you can afford to repay. Living in debt is often the root cause of a bad credit score. Your credit score is not just a financial indicator, but an indicator of your overall behavioral health, your habits, and your dependability/responsibility. These are also factors that influence creditors when reviewing your application for new tradelines. Knowing that this can be difficult at times, our credit specialists at The Credit Lion can help you create a much stronger credit profile! Schedule your courtesy consultation today.
