At 18, most of us start with a fresh credit score. We have no idea what it means but we are excited to be able to use it as an adult. Payments are missed, items are bought, and without even realizing it you directly impact your future options to finance important items. The reason might be that you are just trying to make it to the next check, or you wanted to give everyone a great Christmas, or your car was past its prime. Creditors do not care why you want the money, they just want to absorb you into the debt cycle. Understanding what makes up your credit score is crucial to making it work for you.
When I was 18, I had no idea what made up a credit score. Stubbornly, my decision was to use it as soon as possible. Man, it took years to undo what 18 year old me did. Credit scores rely heavily on payments made and outstanding amounts owed. My credit was showing red in both categories, VERY RED. What did I learn? Pay bills on time and live within my means, oh and get a much better paying job than being a cook at McDonald’s.
Many of us have heard that checking your credit too many times hurts you score, and this is marginally true depending on who is doing the checking and what the reason is. In reality, your credit score is constantly changing and being updated as new details emerge around the factors in the image above. Credit scores above 750 get preferred rates on auto loans, mortgages, and credit cards with better rewards. The catch-22 with credit scores is that you have to have debt for the score to increase. It seems counterintuitive but the right kinds of debt increase your score.
Credit Score Do’s
- Open credit cards and pay full balances of credit cards each month.
- Establish several credit lines and build long histories. (mortgage, auto loan, and a few credit cards)
- Utilize interest-free credit lines for purchases.
- Lower Debt To Income Ratio, requires reducing outstanding debts and living within your finances. (Debt to Income is calculated by taking your bills and dividing by your pay)
Credit Score Dont’s
- Close old credit cards no longer used. Keeping a card open with $0 balance will help your score.
- Open too many credit lines.
- Pay only monthly minimums.
In short, if you want your credit score to increase you have to use credit. Credit scores can be repaired over time, but it’s far easier to maintain a good score than to rebuild a broken one.