According to myFICO, 90% of U.S. lenders use FICO® Credit Scores when making lending decisions so that’s the score we’ll focus on here.
Building a solid credit history in America is something you may want to consider unless you’re cash-flowing your life (which is not a bad thing by the way).
Either way, this post is not to advocate for borrowing money nor cash-flowing but to simply educate on what what a good credit score is and to provide information on the basics on how to get one.
What you decide to do is completely up to you!
Quick Note To My Readers: Some of these links are affiliate links, which means I may receive a commission if you purchase. However, none of the fees of these resources have been increased to compensate me.
What is Credit Anyway?
Think of credit as a snapshot of your financial reputation at any given time.
Lenders consider you trustworthy or able to pay back loans based on how high or low your credit score is at the time you apply.
Whether it be a car, home or credit card, before you walk away with someone else’s money, your credit history is taken into consideration.
Potential creditors need to trust that based on your income and credit history, you’ll pay them back on time and in full.
Pros for Lenders:
- Feel more secure that not only get their principal back, but they’ll also receive interest based on a previously agreed upon percentage.
Pros for Borrowers:
- The more creditworthy you are (the higher your credit score), the lower your interest rate will be.
- Ability to make a purchase that you otherwise may have not be able to without a loan.
- Since credit is just a snapshot in time, it can be improved!
Cons for Lenders:
- Borrowers can default on a loan and may never repay.
Cons for Borrowers
- If you’re considered less creditworthy (lower credit score), the higher your interest rate will be and the more money you’ll repay to your lender over time.
What is a Good Credit Score and How Do I Get One?
Credit scores typically range from 300 to 850.
The lower your score, the less creditworthy you’re considered and the higher the interest rate you’ll pay if approved at all.
- Making payments on time.
- Keeping low credit card balances.
- Only applying for credit that you truly need.
Factors Impacting Your Credit Score
- Payment History
- Do you pay on your accounts on time?
- Amount Owed
- How much of your available credit are you using? High credit utilization is perceived as someone who may be overextending themselves.
- Using less of your available credit is perceived as more favorable so keep this in mind!
- Length of Credit History
- How long have you been using credit? Are you a newbie or a veteran?
- From my personal experience, it seems that the longer my credit history the more favorable.
- Credit Mix
- Installment Loans: i.e. Mortgages and Car Loans
- Revolving Loans: Credit Cards (i.e. American Express and Visa) and Retail Store Cards (i.e. Old Navy)
- New Credit
- How many new accounts opened in a short amount of time?
- The more accounts opened in short amount of time considered a greater risk factor.
How Can You Establish a Good Credit Score if You’re Just Starting Out?
If you don’t have and established credit history, one of the easiest ways to start building one is through a secured credit card.
Your current bank or credit union may be the most convenient place to open a secured card.
You’ll be required to make a deposit into the card and the money you deposit will be your credit limit.
When I started building my credit history, I deposited $400 into a secured card. I then kept the balance low (I aimed for below 10%) and paid the balance each month.
A great way to do this is to set up an auto-pay for something like Netflix or another low-priced, monthly service.
Then schedule payments from your card on or before the due date.
After a year or so, the bank sent me a check for my initial deposit and issued me an unsecured credit card for the same amount of $400.
You can also call your bank, credit union or credit card company and apply for unsecured card sooner. You still may not be approved, but this is an option.
At this point, your secured card issuer has proof of your ability to manage your finances.
If you don’t have a deposit to put down for a secured card, you can also apply for an unsecured card.
However, keep in mind there’s a possibility you’ll be declined since you don’t have an established credit history measuring your creditworthiness.
The Importance of Checking Your Credit Report
Contrary to the sometimes popular belief, checking your own credit score does not count as a hard inquiry and will not lower your score.
If you want to stay on top of information in your credit history, review your Credit Report for free every year.
If you find incorrect information on your credit report, you should immediately dispute or request an update here.
It’s important to check all 3 of your credit reports from Equifax, Experian and Transunion. These are the 3 major credit bureaus in the United States.
Since you don’t know which report will be pulled by a lender, it’s important to check each one so you’ll have a good idea whether or not you’ll be offered the best interest rates possible.
If your score falls in the poor to fair range, continue to work on your score by continuing to use the previously mentioned tips to ensure the best interest rates possible.
I found a really great article on myFICO on gardening your credit over time to improve your scores. There’s simple, yet powerful information on steadily improving your credit score over time.
What Does All of This Mean?
In a nutshell, being responsible is a must if you want to be considered be creditworthy.
You’ll want to only borrow money when it’s absolutely necessary.
Clearly defining your wants from needs is a solid and smart way to determine if loans are necessary at all.
Be realistic about the discipline it takes to pay back loans. Consumer debt can take over and potentially ruin your score if used frivolously.
If purchasing a new wardrobe or funding a vacation is on your why I need credit list, re-evaluate your relationship with money.
According to Cardrates.com, the total of revolving debt in the United States is over $1 trillion at the beginning of 2018!
Whatever your decisions are, make sure you’re realistic about your own ability and willingness to be responsible with your credit.
Do you have a credit win or success story you’d like to share? If so, share with the community in the comment section below. We’d love to here from you!
Until Next Time,