If you do not have a credit score because you have not established credit yet, the good news is that you probably are not haunted by an array of unpaid debt. Here is a quick overview on credit scoring and six simple ways to build and maintain credit.
Credit scores are calculated based on several factors, as seen in the table below.
|Three primary factors in a credit score|
|Repayment history||A history of not paying debts, or not paying on time each month, will lower scores.|
|Amount of credit used||Credit lines near their limits, or maxed out, affect credit scores negatively .|
|Amount of overall debt||Too much debt makes it less likely you could pay off additional debt. Too little debt offers creditors limited payment history, making it difficult to judge credit worthiness.|
Six Steps to Building and Maintaining Credit
1) Obtain and use a credit card wisely
To start building good credit with your credit card, you will need to obtain the card, use it, and make the first payment before you will see any effect on your credit score. You may have to sign up for a “secured card” in the beginning, which means you will be required to deposit money (typically around $300) into an account controlled by the credit card company or bank in order to obtain the card. This deposit "secures" any debt you place on the card. It is a way for a creditor to take less risk when dealing with someone who has poor credit or no credit.
A secured card is just as good as any other credit card when it comes to building credit, for as with any credit card, the payment history on your secure card will be reported to the credit reporting agencies. So by making on-time payments (on-time payments are the No. 1 factor in determining a credit score) and carrying a low debt load (your debt balance-to-credit limit ratio is also a big credit score component), you will be building the history and profile that produces good credit.
Another way to build credit from scratch can include getting a low-limit retail store card or a gas card. Just be sure to pay the monthly balance in full so as to avoid the high monthly interest charges that many of these types of cards carry.
2) Review & understand your credit report
Review your credit report once a year. The higher your credit score, the better. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit. If the report includes items that are inaccurate, request the report be corrected. You can receive a free copy of your credit report at AnnualCreditReport.com and the Federal Trade Commission has a terrific Web site that contains a wealth of information regarding credit reports (including how to address inaccuracies) at FTC.gov.
3) Take a loan
Another good way to build credit history is to pay off a small loan. Borrow from your bank or credit union to purchase a used car or a larger purchase, such as an appliance. Pay the loan on time and in full. Pay any student loans on time every month. (Remember: On-time payments are the No. 1 factor in determining a credit score.)
4) Build job history
A stable job history is another factor that lenders will consider when giving a loan. Creditors look at job history to understand a consumer’s stability and income.
5) Protect yourself from identity theft
Identity theft is at an all-time high, and it can destroy credit ratings. Remember that identity theft occurs both “offline,” and through the Internet. Protect yourself from unscrupulous individuals who could go through your trash, steal account numbers online or get personal information through complex “phishing” scams. Record all important financial information and account numbers in a secure place. Shred all documents that contain personal information. Never give out personal information in e-mails or in a phone call you did not initiate.
6) Create — and stick to — a budget
A good way to maintain a healthy financial lifestyle is to create — and stick to — a household budget. Many people fall into credit score disarray by spending beyond their means, building up debts, and maxing out credit cards. In budgeting, list ongoing monthly expenses (fixed expenses like rent or mortgage payments). Add variable expenses that are “must-buys” (food, gas, medicine). Leave two categories for savings and spending cash (for unexpected expenses and entertainment). Add monthly net income (the amount left after taxes and other paycheck deductions such as health insurance and 401(k) contributions). A free budget guide is available at bills.com.
Good luck as you venture forth into the world of credit, and I hope that the information I have provided helps you Find. Learn. Save.