A common misconception is that building credit is quick and easy, leading many people to put it off until they’re older. However, establishing good credit takes time, and starting early can make life easier, especially as the cost of living continues to rise.
Why Your Credit Score Matters
A credit score is a three-digit number that represents how likely you are to pay your bills on time. Lenders and landlords use your credit score to decide whether or not to approve your application and determine the terms of your agreement. In general, a higher score indicates that you are more likely to make payments on time, resulting in more favorable terms when you apply for credit cards, loans, or rental agreements; this could include lower interest rates, higher credit limits, or better rental opportunities. On the other hand, lower credit scores can result in higher interest rates, stricter conditions, or being denied.
Credit score ranges and their meanings vary across models, but here’s a general breakdown of the two most common scoring systems:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
Priorities for Building Good Credit
Many factors can affect your credit score, but the most influential are your payment history and credit utilization. Your payment history reflects if you pay your bills on time, and your credit utilization shows how much of your credit you are using.
Paying your bills on time is crucial to building and maintaining a good credit score. Late payments hurt your credit score the most, even if you only miss one payment. Missed payments can stay on your credit report for up to seven years, so if there is one thing you take away from this article, remember to pay your bills on time! Digital Banking is a helpful tool to make payments easier and ensure you’re on time.
Credit utilization also carries a heavy weight because it determines how well you pay your debts. One tip to keep in mind is the 30% utilization rule. This rule recommends only using 30% of your credit limits as a guideline. Using 30% of your credit limit as a maximum spending limit shows lenders you can handle credit responsibly. For example, if your credit limit is $1,000, try to keep your balance below $300. Ideally, keeping your utilization even lower, specifically under 10%, can have an even more positive impact on your credit score. High credit utilization can signal to lenders that you're over-relying on credit, which could negatively affect your score and make it harder to get approved for new credit.
Tips to Start Building Good Credit
As previously mentioned, building good credit starts with paying your bills on time, but there are still other ways to start enforcing good credit habits now. Being added to a parent’s or relative’s credit card can help boost your credit score as you start. However, make sure the cardholder you’re linked to has a good credit score because their habits will affect your credit score, too.
Another tip is to open a secured credit card. A secured credit card requires you to deposit a certain amount of money to serve as collateral before you can use it. Then, typically, you can spend up to the deposited amount. You can use this card just like a regular credit card, as long as you don’t exceed your deposit limit. It’s important to note that this deposit does not cover your purchases, and you are expected to pay back the balance each month. These cards are often easier to qualify for compared to an unsecured credit card which is why they are great for those looking to start building their credit.
Building good credit early on can help you stay on track in the future. With better loan rates and easier approvals, you can experience more financial freedom. For now, continue to check on your credit score regularly and be patient; it’s a long-term game!