Credit Scores

Your creditworthiness is represented numerically by your credit score, which is determined by your credit history. A credit score is a three-digit number between 300 and 850 that is used to inform others of how likely you are to pay your debts (and on time!).

Overall, your credit score is an indicator of your ability to repay debt. Even if you don’t think you’ll need credit any time soon, Future You will be grateful for their lower interest rates and credit options because present you started building credit early (and responsibly!).

How to Build Credit

Although it seems counterintuitive, before you have a credit score, you’ll need to establish your ability to manage credit responsibly. You need credit to get credit. This can make it challenging to start building credit, but there are some options for you to build credit from scratch.

Determining a Credit Score

There are two credit-scoring models: FICO and VantageScore. If you’re interested in learning about their differences, you can read more on Credit Karma. However, you don’t need to worry too much about the differences between the two—both models use the same scale and use similar criteria to determine your score. The following can affect your credit score.

Payment History

This takes into consideration your history of late payments, amount of payments, and amount of missed payments.

Credit Utilization

Keep track of your ratio of used credit to credit available. Generally, you want to keep your credit usage around 25-30%. For instance, if you have a credit line of $1,000, you should try to use no more than $300 of it at any given time.

Length of Credit History

The average age of your accounts is factored into your credit score. Avoid opening new accounts frequently to allow your existing accounts to age, and don’t close a lasting credit line unless you absolutely have to.

Types of Credit

Having a mix of credit accounts will impact your credit score. This mix may include credit cards, student loans, and/or a mortgage.

Hard Credit Inquiries

When you apply for a new loan or credit card, the lender will review your credit history. This can have a negative impact on your credit score. Soft inquiries do not hurt your credit score, though. When you request to see your own credit score, it is considered a soft inquiry, thus it does not hurt your credit score.

Credit Reports

Your credit report provides a detailed account of your creditworthiness. If you have a history of missed or late payments, a credit card issuer has good reason to doubt your trustworthiness.

A credit report includes personal information including your social security number, current and past addresses and employers, creditors you’ve done business with, payment history, account statuses, repossessions, inquiries into your credit score, and more.

It’s good practice to regularly review your credit report. Under US federal law, you are entitled to one free credit report every year (instructions here) from each of the three major credit bureaus: TransUnion, Equifax, and Experian. Request your report annually, and make sure it is accurate. If anything is incorrect, you can dispute the errors.

Improve Your Credit Score

Is your credit score less than desirable? Follow these steps to maintain a good credit score or to improve your current score.