Building Your Credit
Last time we talked about Credit Cards. These are one way to build your credit. The nasty thing about credit is that they want you to have multiple lines of long lasting credit. So even though my score is the low 700's, it's not a good score because I only have one line of credit that is less than a year old.
What do they consider in your credit score?
Let's address each of these.
ON TIME PAYMENTS:
This is pretty self explanatory. PAY ON TIME. This is critical. Every credit card will have a payment due date. Know when it is. Write it in your calendar if you have to. Let's say you get paid on the 1st and the 15th of every month, but your credit card payment is due the 13th. You will have to make sure you save the money needed for the payment. If you owe $30 on your card and you don't trust yourself to not spend it on your debit card, take out the money and put it away until the 11th or so when you will put the money back into your account so you can pay. If you're lucky enough to have a credit card through your bank it should give you the option to simply pay online. For most cards (especially the brand specific cards like Target and Victoria's Secret) there is an app you can download to make payments. You can also pay by check, but be sure to send the check at least 5 days early so that they have time to receive it and process it before the due date.
CAPACITY USED
The capacity is your limit. So let's say you have a $300 limit. It looks better to spend only a fraction of that limit than it does to max your card. This is why it is good to use your card for specific things like gas, grocery food and medicine. These are all relatively low cost things that you only buy 2-4 times a month. It would be hard to max your credit card by only buying gas with it for a month, whereas buying books, fast food, movie tickets, etc will add up. If you are the type of person who forgets what they've spent get a check book or a place to write it down. Keep track.
LENGTH OF CREDIT HISTORY
This one is unfortunately out of your hands. All you can do is get the cards started ASAP. The fun part about this-and by fun I mean not fun at all-is that they look at the average "Age" of your credit. So if you opened a line of credit(let's say a Target credit card) when you were 18 and are now 20 you age is 2 years. However, the minute you open a new account the age goes down. Why? Averaging. Welcome back to elementary school math. You have one account that is 2 years old and one that is 0 years old. How old is your credit? 1 year. You add them all together and divide by the amount there are and there you have it. So try to get a couple started around the same time and then take turns with what you use. Get ONE credit card, one or more of the brand specific cards like Target or Victoria's Secret and if it so happens you have a loan at the same time then you've got them all started at once and your credit will continue to age. I am included on an auto loan that my dad took out and so my credit builds with his as we pay. This is a good way to get a loan without crazy interest. Find an adult with credit to take out a loan with you as a copayer. You will both increase credit. However, many adults will not want to do this if they think you will not pay the loan so be aware of that.
TYPES OF CREDIT USED
This goes along with what we just talked about in length of history. Having several types of credit is best. So a credit card is one type, a loan is another. Here is a link to a site that describes the types more in depth.
PAST CREDIT APPLICATIONS
Each time you apply for a new line of credit your score will drop by 10%. So while you want to have a variety of lines of credit try not to open too many accounts. Four should be a good number. Don't worry about the points you lose, you will earn them back if you do everything else you are supposed to.
Well, that was a brain work out. Credit is complex and really annoying to be honest, but it is unfortunately necessary for day to day life. Please, research the subject more if you have any questions and any person at your local bank should be able to help you with these questions as well. Don't stress, it's all going good and you got this.
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