Understanding Credit: Where It Comes From, How it Works and How to Build It
For young people just getting their start in life, a good credit score can mean the difference between getting ahead and staying stuck in neutral. Without a solid credit score and credit history, young people, even those with good incomes, may find it difficult to buy a car, purchase a home or even land a great new job.
The impact of credit scores goes far beyond the mere financial – these three digit numbers are also used to set rates on automobile insurance, and many employers routinely check the credit of their applicants, factoring what they find into their final hiring decisions.
So what is credit, how is it built and what can you do to get your own score off to a great start? Here are some things you need to know about credit scores.
A Range of Credit Scores
The first thing you need to know about credit scores is that they come in a range of values. The lowest possible credit score is 300, while the pinnacle of perfection is 850. Most real world credit scores fall somewhere between those two extremes, but the higher your score the better off you will be.
From car loans to mortgages, lenders generally reserve the most favorable interest rates for borrowers in the top tier of the credit pyramid. Working hard to boost your score in advance of buying a car or applying for a mortgage could save you hundreds of dollars a month.
Ways to Build Credit Fast
If you are young with no credit history, building your score fast can give you a jump start on adult life, but it is important to know which methods are most effective and the pitfalls that could send your score plummeting instead.
There are a number of ways to build credit quickly, and it is important to weigh the pros and cons of each carefully. Here are some effective strategies young people can do to establish their credit profiles.
- Become an authorized user – If you need to build credit but are not ready for the responsibilities and potential dangers of having your own card, ask your parents or another adult to add you as a user. You will still have to pay off what you charge, and as you make those payments you can begin to establish credit in your own name.
- Borrow, and pay back, a small amount of money. Borrowing a large sum without an established credit history will probably be an issue, but you may be able to take out a small loan, especially if you have a long history with a specific bank or credit union.
- Get a credit card. Getting a credit card in your own name is one of the best ways to build credit fast, but it is important to understand the potential pitfalls. If you do get approved for a credit score, you may want to keep your credit limit low to avoid overspending, and always pay off the full balance to avoid high interest charges. Learn how to use credit cards in a smart way.
No matter which approach you take to building credit and boosting your credit score, it is important to be vigilant. A single missed payment or late charge could undo months of hard work to improve your credit score. There are steps you can take to avoid potential problems, like setting up alerts when payments are due and paying automatically from your checking account. These strategies can help you build credit, boost your credit score and get a head start on your adult finances.
Credit Resources
Credit Bureau Contact Information
Check your credit report for accuracy for free through the three major credit bureaus by accessing your report at www.annualcreditreport.com or by contacting the bureaus directly:
Equifax
Report Order: 1-800-685-1111
Fraud Hotline: 1-888-766-0008
www.equifax.com
Experian
Report Order: 1-888-397-3742
Fraud Hotline: 1-888-397-3742
www.experian.com
TransUnion
Report Order: 1-877-322-8228
Fraud Hotline: 1-800-680-7289
www.tuc.com
