When you’re young you have a lot going on –school, spending time with friends, working or trying to get a job, family life, and even balancing your time between it all. It seems like it doesn’t slow down either.
With all that going on you’re probably not thinking about your credit score. At this point in life a credit score has never really mattered, so there has been no need for it to occupy your attention. The truth is now is the time to bring it into your thought process because by making good financial decisions now your credit score will build eventually into a great score. This can potentially enable you to get approved for good loans with a low interest rate saving you money – making you better off financially throughout life.
The Basics of Credit
It’s important to know the basics of how credit scores work to understand the importance of starting young. Credit scores were designed to help protect lenders and banks by letting them know the approximate risk they’ll take on if they lend out money, or an asset to an individual. These lenders do lose money if you don’t pay them back.
After you apply to borrow, a lender will request your credit score from one of the top three major credit bureaus of their choice. These bureaus have names (TransUnion, Equifax, and Experian), and their main purpose is to collect mass amounts of important financial data from financial institutions across the country.
These bureaus don’t necessarily focus on what you buy. They particulary want to know how much money you have borrowed and if you’ve paid it back on time.
The Purpose of FICO
It sounds simple but financial data is very complex for many reasons. Due to its complexity the bureaus rely on an organization called FICO to perform research and to develop an algorithm specifically for their bureau. This is why you might have a close but different credit score at each bureau.
Once your personal financial data is collected, the bureaus chosen FICO algorithm gives you a credit score. Score ranges are different for each bureau but your score typically will range anywhere from 300 to 850. The higher the score the better . Depending upon the lender most consider above 700 a good healthy credit score.
Importance of Payment History
Due to your age, chances are you don’t have a payment history. The FICO algorithms favor a longer, older positive history of paying lenders back. It’s estimated that your payment history can influence 35% of your credit score. Let’s use the 850 point setup for an example, if you have no payment history you may have approximately 300 points less for your credit score, easily dropping you below 600. No credit history will make it difficult to get approved for a home, or even a competitive low interest credit card that offers impressive rewards.
Effective Proven Strategies to Help You Build a Credit Score
If you get started now, paying off debts timely can make a positive difference with your credit score. Here are some strategies to consider if you’re ready to get started:
Meet With a Banker – Most bankers don’t charge to discuss financial goals. With your current situation and needs they can help you identify the best credit options which you can qualify for. They can even help you get started with any applications and help educate you on how to pay back what you’re borrowing.
Research and Apply for a Credit Card – A credit card is always a great way to start to build your credit. Be sure to do your homework. Know the interest rates. Read the small print. Research cards offered by a variety of financial institutions. Don’t get caught in rewards programs that will encourage you to spend beyond your current needs.
Pay Off Your Credit Card Monthly – The credit card you’ll be able to qualify for will most likely have a higher interest rate because you have no credit history. Regardless of the interest rate, it’s very important you pay off your card each month to avoid uneccesary interest charges. Just making the minimum payment will cost you more in the long run because interest charges will build up over time. If you can’t afford to pay it off that month – don’t buy it!
Become an Authorized User on Your Parents Credit Card – If you’re unable to qualify for a card ask your parents if you can be added onto their card. Confirm they have good credit and that they pay their payments on time. By doing this you don’t need to even spend from their card and you’ll be able to piggy back off their credit. After all – in the future they don’t want to be the ones loaning you the money.
Car Loan Co-Signers – If and only if your parents are borrowing money to buy you a vehicle, whether the car is used or brand new, have the loan in your name. If they co-sign there’s a higher possibility of the loan getting approved. A disadvantage to this is you might have a slightly higher interest rate depending on the institution but if you pay your loan on time you will build credit to your name.
Protect Your Identity – Keep important documents like your social security card, drivers license, and any account information hidden away in a safe place. If your identity gets stolen it can severely damage your credit.
If you shop online confirm you’re on secure trustworthy websites, and that you’re on a private computer at home, instead of a public computer. If you check your credit annually you’ll be able to track if anyone has stolen your information. You can check your credit score annually for free at AnnualCreditReport.com.
Work a Part-time Job During School – It’s difficult to build credit if you’re borrowing money to pay off debt. If you have an income and you can show it to a bank in your checking account it will help increase your odds of getting approved for their credit card or loan. There are many other great benefits of working while going to school – including paying off student loan debt faster which can help your credit.