Four things you have to do if you’re just starting out with credit
Being new when it comes to credit isn’t anything to feel ashamed about. Graduating from college or thinking of buying a new home? It’s vital to get on track with a good credit score. Knowing the basics will get you started; For example, not having enough data available about you to produce a credit score will leave you with a ‘thin file.’ Ultimately meaning you don’t have a credit score.
Nevertheless, when you have enough information to create a credit score – as small as it may be – your primary score will be around about the middle. Here four tips to aid you in taking advantage of this benefit.
1. Have a look at your report
Just because you haven’t done a lot to gain you credit, does not mean your credit file is bare. Credit reports are often lengthy and tend to include personal information such as your current employer. Making sure you credit report includes correct data is the first step in working towards a great credit score. Experian, TransUnion and Equifax are the three credit-reporting agencies. Each offer free credit reports, which can be obtained directly through them or by visiting www.annualcreditreport.com. Lenders are not obligated to provide credit information to one of these credit agencies let alone all three. Therefore attaining all three of your reports is essential as the credit agencies do make the odd mistake meaning data on your reports may vary from one to the other.
2. Building bridges
Using credit cards sensibly and starting with a card that suits you personally can be a simple way to build credit. Capital One’s Journey Student Rewards credit card and the Discover it for Students card are specifically intended for young people who can’t get a higher rate rewards card. You won’t miss out either if you have a poor credit score or thin credit file because secured credit cards are there just for you. All you have to do is place a cash deposit – usually between $300 and $500 – and this serves as your credit limit. They are good if you’re just beginning building credit as they are low risk.
3. Be smart with your new card and then upgrade
Another thing you have to know about credit is paying your debts on time steadily is a great way to establish a good credit score. With your first card make a minor number of purchases each month but be sure to pay off the balance in full before or on your due date. After six months you may be eligible to apply for a second credit card.
If you started out with a secured credit card, you generally have to wait 6-12 months before asking the credit card company if they would allow you to change over to a regular credit card. Don’t forget to use the second card as responsibly as you previously have.
4. Keep an eye on your credit score
Defining how credit worthy you are starts by using credit wisely. Lenders only use three-digits on your credit report to decide if they are going to prolong you credit. FICO is the only company that knows who your score is made up, however it is known to be centred on five mechanisms.
- Credit utilization – 30%
- Payment history – 35% – if you have paid well in the past
- Types of credit used – 10% – what you have credit for
- Length of credit history – 15% – how long you have had the credit for
- Recent searches for credit – 10% – if you have recently applied for more credit
Credit utilization is harder to explain. It all relates to your debt-to-credit ratio; or how much you’ve used compared to how much you have left. So if you have $6000 of obtainable credit and have used $3000 of it, your debt-to-credit ration would be 50%. Credit experts say the ration should be 30% or less.
Credit utilization and payment history are the two most prominent factors here. In order for you to achieve a good credit score you must have used credit wisely and utilized the smallest amount of credit possible.
How lenders see you
Credit scores generally fall in to different groups. This is how a lender sees and checks your credit score.
- 700-850 – Excellent credit score
- 680-699 – Good credit score
- 620-679 – Average credit score
- 580-619 – Low credit score
- 500-579 – Poor credit score
- 300-499 – Bad Credit score
Obtaining you credit score
There are numerous ways to obtain your credit score. Try visiting www.myfico.com or try one of the three credit-reporting agencies. However, make sure the agencies don’t make you sign up for a trial subscription, where you would be charged later for the service if you forget to cancel it. CreditKarma.com and CreditSesame.com have a vast amount of other information about your credit other than just your score. This could be as simple as how much your mortgage is. They also offer your credit score for free from one of the three agencies, without being obliged to the trial periods.
Vital things to remember
Remember starting out with good credit is easier than try to fix bad credit. Try to avoid late payments and defaults; they could seriously damage your credit score! Good practises now mean a better financial future.