Introduction To Credit
By Andrea Watson
What They Never Taught You In School
Many of us managed to get through high school and into adulthood without knowing much or anything about credit at all. I had a conversation the other day about building credit from the ground up and how those fresh new adults really don’t know what they’re doing. Have no fear. There are ways to get out of the catch-22 of no card, no credit, no card. In this article we will cover what credit is and how it is calculated and how to build credit from the ground up.
How it Works
Your credit is a three digit number made up of five key factors. These factors determine what the number is and what you can do with your credit. These factors are:
- Payment history
- Your amount of debt, aka your credit utilization ratio
- The age of the credit accounts, or credit history
- The mix of your credit accounts
- New credit inquiries
Payment history affects your credit score the most, accounting for 35%. Eesh! Creditors report your payment history to the three bureaus about every 30 days. This is why it is so important to pay your bills on time!
The amount of debt you have makes up 30% of your score. The credit utilization ratio is found by how much credit a creditor gives you vs. how much of that you use. It’s beat to keep your ratio under 10%.
The age of your accounts makes up 15% of your score. The age of your oldest account and the average age of your combined accounts are what they look for. Older accounts can lift your score so it’s best not to close those old accounts.
The mix of revolving debt and installment debt make up 10% of your score. Revolving debt would be the things like credit cards and the installment debt is things like car loans.
Credit inquiries are either soft or hard. Soft ones don’t go on your report, but hard ones do. Hard inquiries can lower your overall credit score. There are sixteen more things that can affect your credit score. I recommend checking out credit.com here for more detailed information.
How to Build a Credit Score
There are several things a person can do to build up credit. Establish a mix of revolving credit and loans. You can do this by
- Becoming an authorized user on a parent’s credit card
- Take out a federal student loan
- Take out a loan with a cosigner
- Get a secured credit card
- Get a credit builder loan
- Use a free service like Experian Boost or Credit Karma for tips, suggestions, and general help in raising your score.
One type of revolving credit you can try is store credit cards. These do not come with annual fees, and they still report to bureaus like other cards do. As long as you make your payments on time your credit will creep up. For more information on using store credit cards, visit Self.inc.
Taking Out Loans
There are a few different loan options you can take when trying to build credit. Student loans are easy to get if you are going to college. Plus, you don’t have to pay them back until after you graduate! Credit builder loans are usually given out by credit unions or banks for the express purpose of building credit. Taking out a loan with a cosigner requires someone who trusts you to make your payments. If you fail to pay, the cosigner is legally responsible for the debt. Visit Money Under 30 for more information on these different types of loans. No matter which one you choose, remember to always make your payments on time!
Time is of the Essence
One more thing to remember about building credit is you need patience. It takes about three years to go from zero to decent. It takes about seven years to rebuild bad credit. This is why it is important when you are starting out to look at your options. Loans, revolving and installment credit, using cosigners and paying bills on time are all things that will help you on your way. One more thing- keep an eye on your credit. You can get one free credit report every year by going to annualcreditreport.com. Make sure to dispute any errors right away. It is much easier to build up than to repair. Be smart about your credit and life will be much smoother for you!
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