Dear Kim,
As a young person, what are the best ways to build a credit score?
-Young and Building My Credit
Dear Young and Building My Credit,
Great question. Building your credit score has never been more important. It can affect the rate you pay on loans, your ability to get loans and can even affect your career options. Recognizing, when you are young, that it is easier to create a good credit score than to fix one, puts you on a great path. Here are some things you can do.
1. Get a credit card, ideally one with a small line of credit to start, so you can build your credit rating without the danger of going deeply into debt. To avoid running up your balance, consider getting a card that you can track on-line, preferably by the same on-line or mobile app. Use the card for smaller, regular purchases such as fueling your car. Then use the on-line or mobile access to pay the card off right away. You could make it a weekly habit to transfer money from your checking to pay off the card. You will build a payment history, have the added protection of paying by credit card, possibly earn rewards points on your card, and not pay interest! Careful though – too many credit cards will likely hurt your score and charging up to the card limit can also work against you. Do not fall for every store’s credit card to save a bit today. Pick up to three cards to have in your wallet, at the most.
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2. A car loan is another great option for building your credit and paving the way for future needs like a home loan. And here are a few things to keep in mind as you shop for that first car: Keep it reasonable. Don’t buy the most expensive car you can afford. Get a reliable car that meets your real transportation needs. Research a few models on-line first. Avoid the temptation to take a six-, seven- or even eight-year auto loan on your first car. Try to keep the loan term to no more than four years. The quicker you pay the car off, the more interest you will save. One of the best things you can do is visit with your lender and get prequalified for a car loan BEFORE you go car shopping. You’ll know what you can afford going into the transaction.
3. Set your payment up on automatic payments. A late or missed payment will hurt your score quickly. That means, do not be late in your payments. Ever. Do whatever you have to do to make sure your payments are made on time. This cannot be over emphasized! One late payment can unravel all the hard work you have done building your credit, and can wind up costing you hundreds or even thousands of dollars in interest in the future! To avoid any late payments:
• Watch your account balances regularly, and don’t just toss mail from your lenders—it could very well be a courtesy notice that your payment wasn’t received.
• Set up automatic payments on any recurring bills, including your credit card or any other loans. This system protects your credit rating by insuring no late payments and is much more reliable than counting on mail delivery.
• Build an emergency fund savings account so you can handle unexpected expenses and still pay your regular bills.
• If all else fails and you are concerned you may not be able to make an on-time payment, call your lender BEFORE you are late! It is much easier to work out alternatives before you get behind, and reaching out to the lender instead of making them contact you shows you are not trying to avoid your obligations.
You can be financially successful, and building your credit rating is an important part of that.
-Kim
What is a credit score?
Credit scores are generated by reviewing financial behaviors like; your monthly payment history, the type of loans you have, how long you’ve had the accounts, how much unused credit you have available to you, whether you have ever declared bankruptcy, and more. These factors produce your score, typically between 350 and 850. The result of your credit score is a prediction of your “creditworthiness” and the likelihood that you’ll pay back (or not pay back) your loan or credit card debt.
