When you’re just starting out in life and you don’t have a credit score at all, the whole concept of having credit, building it, and maintaining it can seem very daunting.
Fortunately, there is quite a lot of information available on how to maintain good credit from the time you pull your first credit report. However, first, let’s break down what a credit score is and why it matters.
What Is My Credit Score?
Your credit score is also called your FICO score. FICO stands for ‘Fair, Isaac, and Company,’ which was founded in San Jose, California back in 1956. It developed the score that we use today to decide whether someone is “creditworthy”. This is what a lender looks at when they’re determining whether to give you that car or home loan that you want.
Your FICO score takes into account the types of debt that you currently have, how much you owe on those debts, how many new accounts you’ve created recently, and how long you’ve had any type of credit at all. The lowest score you can have under FICO is 300 and the highest is 850.
If you want a good chance at having credit extended to you often, you’ll want to see your score above 650.
How Do I Start My Credit Off Strong?
When you start out, you don’t have a credit score at all. Until you’ve had credit extended to you and you’ve made use of it for at least six months, you don’t have a score.
If you do as you should during that first six months, though, you could pull your credit score for the first time and be surprised with a score of over 700. Do poorly, though, and it could be significantly lower.
What is important to know at the beginning of building your credit is that whatever mistakes you make early on can hurt you more. Because you don’t have much history, small mistakes can hurt big and require you to later perform credit repair.
There are a few different things that you can do to keep your score up above that 650 mark. The very first thing that you’ll want to do is understand what does and does not affect your credit score.
On-Time Utility Bill Payments Don’t Count
Your credit score isn’t going to take into account the payments that you make on your utilities every month. The fact that you paid them on time isn’t going to help your score. This includes electricity, rent, water, internet, cable TV, gas, etc.
These things aren’t reported to credit bureaus unless you’re very late or if you’ve let the bill go so long that they send it to a collection agency. At that point, you’re looking at a negative mark on your credit report due to it being in collections.
Overdraft Fees at Your Bank Don’t Count
Your bank doesn’t report overdraft fees to credit bureaus either. Bouncing a check for groceries isn’t going to hurt your credit score. However, if you allow the overdraft fees to remain until the bank turns the balance you owe over to a collection agency it will hurt you.
Soft Inquiries Don’t Hurt Your Credit
When someone does a soft inquiry on your credit, such as for a background check to get a job, it doesn’t negatively affect your credit score the way a hard inquiry does. Soft inquiries don’t hurt your score because people and companies don’t need your permission to run them, you’re the only person who can see them on your report, and they’re not a request for credit.
Make Your Payments on Time
Whether it’s a credit card or a car loan, you always want to make these payments on time. Your credit lender will report to the credit bureaus when you’re late and because payment history accounts for around 35% of your credit score, consistent late payments can hurt your score.
If You Have Credit Cards, Keep the Balances Low
When you have a credit card, you should only keep up to 30% of the balances available used at any given time if you have to carry a balance at all. If your cards have a combined limit of $3,000, for example, you only want to have a maximum of $1,000 showing owed at the end of your monthly billing cycle across all of them.
Ideally, however, they should be paid off every month, even if you have to use them again. The reason for doing this is that credit card companies will report the balance that you owe at the end of your statement period to credit bureaus. You don’t want them to report a higher amount than 30% owed on your cards, but reporting 0% is the absolute best for your score both short- and long-term.
If you don’t pay off credit cards every month and the balances keep going up, your risk assessment goes up even further the longer you let this happen. The reason for this is if you are being more dependent on revolving credit and your balance keeps going up, you’re revealing yourself as slowly drowning in debt to your potential lender.
Don’t Apply for New Credit Accounts Often
When you apply for credit, you’re allowing a company to pull your credit report so they can decide whether to lend to you. This shows as a ‘hard inquiry’, which always knocks a few points off your score. If lenders see that you’re applying for credit too often, it makes you appear desperate for credit and gives you away to lenders as a higher risk.
Keep a High Ratio of Installment to Revolving Credit
Long term, you want to have more installment credit than you do revolving credit. For example, a car loan for $20,000 is considered installment credit, while a credit card is revolving credit. If your installment credit is significantly higher than your revolving credit, lenders know that you’re not desperate and living off credit cards.
Your Debt to Income Ratio
Most lenders will consider you a high risk if your debt to income ratio exceeds 40% in most cases. In other words, if you have an income of $8,000 per month and you have revolving and installment credit in excess of $3,500 per month, you become a higher risk.
Closing Old Accounts Can Hurt
Even if you’re not really using a credit card that you’ve had a while, it’s not in your best interests to close the account. Credit bureaus consider that old active account and weigh it more heavily than younger accounts.
If you do have to close an account for some reason, make sure that doing so isn’t going to increase your debt to credit ratio. You should still only have 30% of your balances or less used after the account is closed.
Pull Your Own Credit Report to Guard against Fraud & Theft
Keeping an eye on your report is a good way to guard against identity theft and credit card fraud. When these things happen, you want to catch them as quickly as possible because they can lead to extremely negative information appearing on your report and lowering your score.
Even if you’re not a victim of either of these things, however, you can still benefit from watching your score because sometimes lenders do make mistakes in reporting that you can get corrected.
Don’t worry about pulling the report often, though. As mentioned before, it’s a soft inquiry, so it won’t hurt you.
Keeping Good Credit Is Simple if You Follow the Rules
If you can follow all of the tips above, you’ll be able to keep your credit in good standing. Stick fast to the rules when building your score from scratch in the beginning, but the key to keeping your credit score high is consistency in making your payments on time, keeping old accounts open, guarding against fraud, and keeping your revolving credit balances low.