Even if you refuse to believe that today’s world is insanely materialistic, you will surely nod in agreement if I say that some numbers and scores play a crucial role in our life. Some of them are so powerful that they can make or break our biggest plans.
As you can guess from the title, I am going to talk about all the ins and outs of a credit score. I chose the topic partially because it’s one of the most important scores in our adult lives. And partially because I know some proven ways of building it up.
But first, it’s time to brush up on basic information about credit scores.
What’s a Credit Score?
It’s a 3-digit number reflecting your financial background and serving as a proof of your financial reputation. It ranges between 300 and 850 and matters more than you might think.
How’s It Calculated?
As I explained in a more detailed article about credit scores, this number depends on five factors:
- The length of your credit history
- Payment history
- Credit mix
- Amounts owed
- New credit
While I encourage you to take care of each of the five, know that your payment history and amounts owed are the most critical factors, making 35 and 30 percent of your final score, respectively.
What This Score Affects
Plenty of things. But most importantly, it determines whether or not you get approved for credit, what type of credit cards you’re eligible for, how much interest you pay, and whether or not you qualify for a rental property or any other large purchase or investment you want to make.
Start Building Your Credit Score
From what I shared above, a few things should become apparent. First, your credit score matters. Second, building it up will never hurt. Let’s see what you can do to start boosting your credit.
1. Get a Secured Credit Card
Starting with a secured credit card is easy because you’re qualified for it regardless of your credit history. And if you manage to use it responsibly (read: pay on time and keep balances low) for at least 6 months, you’ll get a chance to open a standard credit card and continue building your credit history while enjoying all the perks of a credit card owner.
2. Find a Co-Signer for Your Credit Card
Another way to get a credit card with a low (or no) credit score is to find a co-signer. This allows you to qualify for a standard credit card based on someone else’s solid credit history. Once your credit card is issued, you can use it for building your score. Still, bear in mind that a co-signer is responsible for everything that happens to your card, meaning you might put another person into a serious trouble by failing to pay it off every month.
3. Become an Authorized User on Someone’s Credit Card
Ask a family member or close friend to make you an authorized user on their credit card. With this, you’ll have an access to the card, and are able to report your authorized user activities to credit bureaus. Bear in mind that your financial failures may affect the primary owner of a credit card, so always use it responsibly.
4. Consider a Credit-Builder Loan
Although the name of this loan speaks for itself, so little is known about this options that a brief explanation is needed. A credit-builder loan is offered by some credit unions and community banks with a goal of helping people build their credit score. In nearly all cases, it’s as simple as that: You borrow money and pay back the lender as with any other loan.
5. Take Advantage of Your Rental Payments
If you’ve managed to qualify for rent with a low credit score and now make monthly payments to your landlord, I’ve got great news for you. With modern services like RentTrack or Rental Karma, your rental payments may count on your credit report. If you always pay your rent on time, this will go a long way in building your credit score.
In the end, living with a high credit score allows you to be free of limitations and restrictions that people with a low score face. So, remember: the best way to have a good credit score is to follow good habits. Make all payments on time (utility bills are not an exception), keep your credit use low, don’t open too many cards and accounts, and don’t forget to check your credit report at least once a year to make sure there are no errors or discrepancies. Follow these practices, and it will pay off with a high credit score.