The Beginner’s Guide to Credit Scores

• The novice attitude to credit is that of easy money with no strings attached. Given this attitude, most millennials end up having negative first experiences with credit - think unpaid credit card bills and mismanaged repayments. Building good credit is a fundamental necessity for today’s consumer. A positive credit history is considered table stakes for you to rent an apartment, or purchase a car, or even a home. Utility companies, including cable, electric, cable, or cell phone, will often extend monthly payment options only if you have established credit. And, don’t even consider the possibility of getting a loan from a bank without having a positive repayment history on a credit account. In fact, many employers will check an applicant’s credit before offering a job.
• 
  
• So, if you need credit to build a credit history, but most lenders won’t extend credit in the first place, what do you do? There are ways – most relatively easy – to build credit, and it all starts with understanding why credit is so important.

• Your credit history stays with you from the minute you apply for your first credit card or take out your first loan. It shows lenders how well (or how poor) you’ve handled credit accounts in the past, if you made payments on time, how many lines of credit – loans, mortgages and credit cards – you have, and your total debt load. It also shows lenders if you’ve ever filed for bankruptcy, had any accounts taken to collection, or if any negative actions have been taken against you in the past.
• 
  
• Credit bureaus monitor your credit and create credit reports that show your creditworthiness. This information is used by lenders to judge the likelihood that you’ll repay your loans on time. It’s also used to calculate your FICO score or VantageScore.

• Your credit score is a three-digit number between 300 and 850 that shows how well you’ve paid your bills in the past and the likelihood you will pay your bills on time in the future. The higher the score the better.
• 
  
• Banks, credit unions, online lenders and other institutions use this number when reviewing a request for credit. They also use your employment history, debt-to-income ratio, income, and more, but your credit score is usually the first thing they look at and often what they base their decision on.
• 
  
• According to Experian, a score between 300-579 is considered very poor, 580-669 is fair, 670-739 is good, 740-799 is very good, and anything over 800 is considered exceptional. A mere 21% of people are thought to carry exceptional credit scores on average.

• Your credit score is a tool for measuring your credit and was created by either the data analytics company, FICO, or by VantageScore Solutions. They are not the only credit scoring models used by lenders, but they are the most common. To calculate your score, they use five key components that vary in importance. Each one of these components is taken into account when extending credit, not just one.
• 
  
• • Payment history. Your payment history essentially shows how well you pay your bills. It also looks at whether or not you’ve been delinquent, sent to collection, or had any bankruptcies in the past, and how long it took to resolve any problems. Payment history counts for 35% of your score.
• 
  
• • Total amount owed. Lenders look at your debt-to-income ratio, or how much debt you’re carrying compared to your income, and your ability to pay your bills. The total amount you owe on all credit accounts makes up 30% of your score.
• 
  
• • Length of credit history. Since your credit history is an indicator of how well you’ve paid your bills in the past, someone with a long history of on-time payments is a much safer bet than someone with a short-term credit history or no credit history at all. Your credit history counts for 15% of your overall score.
• 
  
• • New credit accounts. Every time you apply for credit, it’s not unusual for your score to get dinged. If you overextend your credit limits or apply often, it probably means you’re under some financial pressure. How many new accounts you open counts for 10% of your score.
• 
  
• • Mix of credit types. FICO looks at the mix of all credit from loans, credit cards, mortgages, car loans, and more. How well you manage that mix is 10% of your overall score.

• Maybe you think that all credit scores start at zero (such a lonely number), and you have to climb your way up from there. But it doesn’t work like that. Credit scores range from 300 to 850. Even someone with no credit doesn’t start at zero. Credit scores start at 300; sometimes higher, depending on which scoring system is used.
• 
  
• According to FICO, you must have at least one credit account that’s been open for at least six months, and one credit account that’s been reported to credit bureaus within the past six months to have a credit score. You can meet these requirements with one account or several.

• Most of the time you can check your credit report for free. There are four main ways to check your credit score, according to the Consumer Financial Protection Bureau.
• 
  
• 1. Many credit card and car loan companies let you check your credit score for free. In fact, they recommend you check your reports at least once a year for any errors.
• 2. Most non-profit credit counselors provide free credit reports.
• 3. Many online services, like CreditKarma.com, Credit.com, and CreditSesame.com let you check your credit score for free. Some others may require you to subscribe to their website or sign up for credit monitoring to get your free credit score.
• 4. You can also request a free copy of your credit report from the major credit reporting agencies once per year at AnnualCreditReport.com. Or you can call 1–877–322–8228.

• How do you show a history of making payments on time if lenders won’t give you credit? There are several ways to build credit that will show up on your credit history over time. Some are easier than others, but it starts with getting a job and earning an income.
• 
  
• Employment history
• When considering a borrower’s ability to repay, lenders will almost always consider employment history and salary, as they are looking for stability. On most credit reports, there is a place for employment history. If you’ve been at the same job for years, you are usually seen as a better prospect for credit. On the other hand, if you’ve jumped from one job to the next, you are sometimes viewed as less reliable and a greater risk for making repayments.
• 
  
• Secured credit card
• A good place to start building credit is with a secured credit card. This type of credit card is backed by a cash deposit, which is usually the credit limit on the card and is one way to build credit so that you can qualify for an unsecured credit card later on.
• 
  
• You can use a secured credit card the same way you’d use any other card. But, if you buy something and don’t pay the balance in full by the due date, you will incur interest charges, so it’s important to have sufficient income to make your payments. You’ll also want to verify that the card you choose has a low annual fee and reports to all three credit bureaus so you actually build credit while using it.
• 
  
• Credit card
• If you don’t already have credit, you may think you can’t qualify for a regular credit card (rather than a secured card). But, that’s not always the case. Some credit card companies will offer a card to you, but it will likely have a higher interest rate and a lower spending limit than if you already had established credit. Still, a credit card is the fastest way to build credit if you can commit to making on-time payments and to keeping your balances low.
• 
  
• Checking account
• Opening a checking account won’t build credit, as any transactions aren’t reported to the credit bureaus. But, opening a checking account and maintaining a balance with no overdrafts will help you build a relationship with the bank or credit union where your account exists. That way, when you do need a loan or a bank credit card, the relationship you’ve built will go a long way in getting you qualified.
• 
  
• Credit-builder loan
• Just like the name suggests, a credit-builder loan’s sole purpose is to help you build credit. Like a forced savings account, the money you deposit in your account is held there until you repay your loan, and your payments are reported to the credit bureaus. This type of loan is most often offered by community banks, credit unions, and a few online lenders.
• 
  
• Loan amounts typically range from $500 to $1,500 and interest rates vary. But there are fees for opening the account, for processing payments, and administration fees that can add to the total cost of the loan. To build good credit, you’ll need to make your payments on time and pay the balance in full by the due date.
• 
  
• Secured loan
• Much like a credit-builder loan, a secured loan requires collateral, like the money you have in a bank account, a money market account, certificate of deposit (CD), or another asset like your car. Interest rates tend to be a bit higher, but a secured loan doesn’t require a minimum credit score, so it’s a good choice to build credit if you have none. Loan amounts vary but can be as high as $100,000.
• 
  
• Retail store card
• Credit cards from stores like Amazon, Target, Best Buy, or Walmart are great for building credit at a low cost. Most retail store cards offer discounts on your first purchase as well as ongoing rewards or cashback offers. Most don’t charge annual fees, but interest rates can be high-up to 27%+. Some store cards require a minimum credit score to apply, but most don’t. However, you will have to show income to prove you can make the payments on your account.
• 
  
• Co-signer / authorized user
• Sometimes a family member will step up and act as your co-signer on a loan or credit card. It can improve your odds of getting a loan and possibly even get you a lower interest rate. However, if you don’t make your payments, your co-signer is on the hook for the full amount. But as long as you pay your bill on time, you’ll be establishing credit. And, when the loan or credit card balance is paid in full, you can re-apply on your own.
• 
  
• Another option is for your family member or significant other to add you as an authorized user on his or her account. Even though payments are added to your credit report, you don't actually have to use the credit card to cash in on being an authorized user. However, you'll want to be sure the primary user has a history of making payments on time, or your credit will also suffer.

• Although getting a credit card and making payments on time every month is the fastest way to build credit, there are ways to build credit without opening a credit card account.
• 
  
• Student Loans
• Paying your student loans on time can have a positive affect on your credit, much like other types of debt. Even if your student loan payments are in deferment, lenders will look at how much you have to pay back to determine if you are a good risk to take on even more debt. But, student loans can also place added pressure on your finances, and late payments will adversely affect your credit score.
• 
  
• Rent
• Sometimes if your landlord reports your payment history to credit reporting agencies, you can build credit by making your rent payments on time. Not all landlords notify credit bureaus, so services like PayYourRent or RentTrack let you pay your rent online, and they will report your payments to all three bureaus.
• 
  
• Auto Loan
• Another way to jumpstart building your credit is by getting a car loan. Even without a credit history, you still may be able to qualify. You may need a co-signer on the loan and your interest rate may be higher than if you have a positive history, but if you’re able to make a good downpayment, your loan amount will be lower and lenders will see you are serious about meeting those monthly payments.

• Charge cards. Unlike credit cards, charge cards require you to pay the balance in full each month. They work the same as credit cards, but charge no interest, come with generous award benefits, but also charge a high annual fee.
• 
  
• Revolving credit. Revolving credit allows you to pay a certain amount each month, but there is no due date when the entire balance must be repaid. You can carry a balance, borrow more (up to a preset limit) and pay as you go. But, you will be charged interest on any outstanding balance. Credit cards are the most common type of revolving credit.
• 
  
• Service credit. When utility companies or your landlord bills you for services you’ve already received, it is called offering you service credit. Every month you agree to pay an agreed-upon amount. Your payments don’t show up on your credit account unless you fail to make your payments and the company or landlord reports late payments to a collection agency or the credit bureau.
• 
  
• Installment credit. Installment credit is a loan, like a mortgage or car loan. With an installment loan, you borrow a certain amount of money and agree to repay it, usually in monthly installments until the loan is paid in full. You are charged interest over the life of the loan, which usually ranges from several months to years.

• Now that you’re building a positive credit score, the last thing you want to do is ruin what you’ve worked so hard to start. It’s a lot easier to damage your credit than build it, so follow a few simple rules to show you’re a reliable borrower.
• 
  
• Pay bills and loans on time. Lenders want to know they will be repaid on time every month when lending you money. The best way to qualify for any type of credit is to show you pay your bills until they are paid in full.
• 
  
• Don’t let your accounts go delinquent. Missed payments and letting your credit accounts go delinquent can damage your credit history. While losing your job or an unexpected emergency can play havoc with your finances, once you’re able, the first thing to do is try to bring all delinquent accounts current. While your credit will be impacted in the short-term, making sure you don’t miss payments in the future will repair any damage that’s occurred.
• 
  
• Don’t open too many accounts at once. Nearly every time you apply for credit - whether a loan or credit card - your credit score takes a hit. For that reason, you don’t want to apply for a secured loan and a credit card on the same day. Besides, lenders assume that many accounts equals a great deal of debt that may not be repaid. The only exception is when you’re shopping around for the same type of loan, like a car loan. Even if you make multiple inquiries within a 30-day period, each inquiry only shows up once at the credit bureaus.
• 
  
• Don’t close all your accounts. While it’s true you don’t want too many accounts open at once, you also don’t want to close accounts with low balances and high credit limits that have been open for a long time. These accounts can have a positive impact on your credit.
• 
  
• If you do close accounts, take a look at any inactive accounts and credit cards that you haven’t used for some time but charge high annual fees or interest rates. It’s best, however, to keep enough credit card accounts open, as long as your total balance on all accounts is less than 35% of each card’s total credit limit.

• You may be tempted to pay to have your credit history wiped clean, but is it worth the cost? Let’s understand how one would go about paying to clean up credit history.
• 
  
• Credit Repair firms
• Credit repair firms dispute negative information on your credit report. The hope is that the negatives will go unnoticed and be removed. Under the Fair Credit Reporting Act (FCRA), if you dispute an item with the credit reporting agency, but it cannot be confirmed with the collection agency or lender, it must be removed.
• 
  
• Although it doesn’t always work, sometimes credit report firms are successful in getting some items removed. Laws don’t permit credit repair firms to charge you for services before they are performed, However, many people have signed contracts and paid hundreds of dollars and did not get negative information removed.
• 
  
• Pay to Delete
• When you “pay to delete” you pay a credit reporting agency or collection agency to delete negative information on your credit reports. The FCRA does not prohibit the practice, but the organization that represents credit reporting agencies, the Consumer Data Industry Association (CDIA), does prohibit reporting agencies from removing negative information in exchange for payment.
• 
  
• That said, there are companies that work around CDIA regulations and help consumers with negative credit negotiate payments or settle their accounts for less than what is owed. Keep in mind, however, that it can be very expensive. And, unfortunately, even if the negative report is marked as paid, it is not removed from your report.
• 
  
• Keep in mind that you are entitled to one free report each year from all three credit bureaus. You can check for mistakes, like payments you paid on time are marked late or negative information that should have been removed long ago. You can also dispute these issues on your own to get them removed. And, you can usually do all this for free.

• There are two types of credit inquiries – hard and soft. Generally, when a bank, credit union, or online lender takes deep dive into your credit, it’s called a hard inquiry. Hard inquiries impact your credit and will usually cause a drop in your score, which fades over time.
• 
  
• A soft inquiry (or soft-pull), usually happens when you check your own credit report, or a company checks your credit for promotional purposes or as a background check. For instance, an employer may do a soft pull on your credit to decide whether to offer you a job. Most soft inquiries are made without your permission unless you make the inquiry. But, soft inquiries don’t show up on your credit report, and your score is not affected.

• Your credit score can be a bit different depending on the scoring model used by lenders, and which credit bureau or bureaus they use when checking your credit. Not all lenders use all three of the major credit bureaus – Equifax, Experian, and TransUnion. Some only report to two, one or none at all.
• 
  
• That said, most consumer credit companies use either FICO or VantageScore Solutions. But the three credit bureaus also create their own credit-scoring models with each model weighing slightly different credit factors.
• 
  
• To add to the confusion, there are up to three different FICO models–one for each credit bureau, including the most widely used model, FICO® Score 8, and VantageScore has released four versions since it was introduced in 2006. Plus, credit bureaus often take a while to receive the most up-to-date information from lenders, so your score might not change as quickly as you want.
• 
  
• And, since your credit score can change at any time, it’s best to compare credit scores from the same date. It’s also important to review your credit report from all three credit bureaus, if possible. You can usually get one free report each year, and it won't impact your credit score. Mistakes happen and if you find any incorrect information on your report, contact your credit reporting agency and your lender to dispute missing or inaccurate information.

Now that you know how to build credit and why it’s so important to your future finances, you may feel you’re ready to take the first step. You can start building credit with the help of a parent who will co-sign a loan or add you as an authorized user on their account. But, if you want to establish credit on your own, consider if you're willing to meet these basic requirements.

• • You want a car, need to rent an apartment or have an interest in getting a credit card.
• • You can commit to using your money wisely by saving, budgeting, and paying your bills on time.
• • You know how credit works and understand the pitfalls to mismanaging debt.
• • You have a job and you’re earning sufficient income to pay your bills.
• • You understand that poor credit follows you around like a bad cold and is difficult to reverse, so you’re willing to do without things you may not need in order to pay your bills on time.

• Building credit from scratch can take time, but it doesn’t have to be an uphill battle. Finding a credit card with no annual fee is probably the best way to begin the process. You could also open a retail store card. Just be sure to make payments on time every month, charge only what you can afford to repay and use your card responsibly.
• 
  
• Opening a checking account or savings account will help establish a relationship with a bank or credit union. Over time, that relationship could result in a short-term loan, which is another great way to build credit. If a credit card company or bank won’t extend you credit, finding a co-signer that is willing to work with you until you’re able to qualify on your own is another option worth considering.
• 
  
• While it can be easier to damage your credit than build it, forming good spending habits, budgeting, and paying all your bills on time can help you build a positive credit score and make your credit stronger, no matter who checks it out.