Building Your Credit

Category : Money

An intern working for me recently asked how she could build her credit score. Happy to help I asked her what she knew about how credit scores work and what they are for. She shared that she knew a little and opened a credit card with a $500 limit about 6 months ago that she was paying off every month. Other than that, she didn’t really know much. Here’s my guide to building early-career credit scores.

Credit Score (Jeff’s definition) – A number in a range that is an indication to lenders of how likely someone is to pay back a loan on time. Some also consider it an indication of financial decision making.

Okay, let’s start with what a credit score is then move on to what it is for and how you build one. You can just read this post for an overview or you can follow the links to go more in depth. If you want to improve your score, I suggest you take the time to learn about this.

What is a Credit Score

credit by Kalyan on FlickrA credit score is a number that provides an indication to a lender of how likely you are to pay back a loan on time. That’s it! Now, these days many types of businesses use your credit score, for example landlords, potential employers, credit card companies, and the banks extending you a loan. That list includes a couple that might be new to you: employers and landlords. This is because more and more businesses are finding that the credit score is a good indication of how you make financial decisions, not just whether you will pay back a loan or credit account on time.

Many things go in to the credit score, including:

  • Number of bank accounts, credit cards, and loans
  • Age of accounts
  • Types of accounts
  • Payment history of credit cards, loans, and bills
  • Credit limits on credit cards and store cards
  • Amount due and monthly payment on credit cards, store cards, and loans

Here are things that do not go in to credit scores:

  • The amount of money in your bank account
  • Whether you have a job
  • How much money you make
  • Accounts or history outside your home country (generally)

Learn more about what is in and not in your score here (USA specific):

In the USA Credit Scores are created by private businesses and the scores are sold to businesses, banks, and others. So, there are actually many companies that have score information and it can vary from company to company.

Why Do I Want A Good Credit Score?

Eine Opossum Liebe machen auf eine Melone by Tom on FlickrHere are some things that are easier when you have a higher credit score:

  • Buying a house with a loan
  • Rending or leasing an apartment
  • Buying a car with a loan
  • Buying an engagement ring with a loan
  • Opening a credit card account
  • Increasing the credit limit on your credit card account
  • Getting a job

The reason all these things are easier is that businesses providing these things to you all use your credit score to help make the decision on doing business with you. They also use it to help decide the terms they offer you for loans or payment.

For example a landlord may require more money up front and a higher security deposit if your credit score is lower. A bank or car dealer may offer a lower interest rate if your score is higher because it suggests you are more likely to pay on time every time, and so lower risk for them.

Okay, let’s get to how to build (increase a credit score).

How Do I Build Credit (Get a Better Score)?

grow by brian donovan on FlickrBuilding credit is about doing a variety of things and making good decisions with money. A credit score is based on information about your situation and behavior so you want to have the right behaviors consistently. Everyone’s situation is different so feel free to drop comments below (but be smart about what you share, don’t give out bank names account numbers, etc) and from time to time I’ll drop in to give you specific guidance. You can also use the contact form.

The basic accounts everyone should have:

  • Checking
  • Savings
  • Credit Card

The behaviors everyone should use every month:

  • Pay your utility bills on time, every single month
  • Pay your rent or lease on time, every single month
  • Use your credit card every month but don’t go over 50% of the credit limit
  • Pay the full balance on your credit card on time, every single month
  • Take any notices that you are late on payments seriously and resolve the problem

Here are behaviors you should show every year:

  • Ask your credit card company for an increase in the limit on your card
  • Get your credit report (not your score) from all three credit reporting agencies (USA specific) and review the information. If anything is inaccurate, get it fixed.

Here are some other ideas on improving a credit score:

That’s it. Having these accounts and using these behaviors will build up your credit score over time. This isn’t something that happens over night, particularly if you need to open accounts now or change your behavior. This is something that you set yourself up for and then make a difference with good decisions every month and year.

As I said before, feel free to drop questions in the comments or use the Contact form. I’m happy to give you guidance on your situation if you want it.