The internet is full of articles about credit—how to get it, how to use it, and how to best manage it. You might hear about “good credit” and “bad credit” and so on. What is a good credit score? Why should you care about any of it?
If you’re a new worker without loans or credit cards, you may not know the answers to those questions, but they will become important as you start out in the workforce as a young professional. It pays to start with the basics.
A credit report is just what it sounds like; a record of how you’ve handled credit (credit cards, loans, etc.) in the past. Having “good credit” simply means that your credit report shows a good track record with paying off debt and managing income. The opposite end of the spectrum, having bad credit, would mean you have struggled with your obligations (either missing payments or spending too much on credit).
Your credit score is the easiest way to understand whether you have good or bad credit. Credit scores generally range between 300 and 850. If your score is 700 or greater, then you have good credit. Your credit is moderate with a score between 650 and 700, and scores below 650 are considered poor.
As you develop in your career, earn a salary, and make financial moves, you will also have chances to develop your credit. Going back to this question: why should you care?
Just How Important is Credit?
To put it simply and cheaply, it’s very important! That might not be enough to convince you though. Here’s a little more insight.
Your credit score factors into nearly every financial move that involves borrowing money. When you apply for a credit card or loan, lenders check your credit to see if you’re a worthy consumer to lend money to. If you have better credit, then your chances of being approved are higher; contrarily, your chances of approval are worse if you score is low.
When you’re talking about a new credit card, getting declined may not sound like a big deal. But what if you’re trying to get a mortgage for your dream home? Having excellent credit could mean the difference between a successful bid and continuing the home search.
It doesn’t end with mortgages. Landlords often check credit reports before renting an apartment. Some employers look at your credit report before deciding whether to hire you. If you have bad credit, it could cost you a place to live or your dream job.
Furthermore, those with high credit are offered better deals that you’d miss out on otherwise. For instance, high-end credit cards with better perks and lower interest rates are often reserved for consumers with excellent credit. And you are more likely to qualify for lower interest rates on different loans.
So, it’s safe to say that having good credit is important. Unless you have millions of dollars, you will probably need to rely on a mortgage, a loan, or a credit card at some point in your life. Bad credit can act as an obstacle when you want to get moving in life – like buying a new home.
If you’re stressing about how to build credit, don’t worry. It’s relatively simple despite its importance. Here are a few tips to keep in mind moving forward.
How to Start Building Credit
It’s never too early to start thinking about your credit score. These tips are tailored for someone who may not understand the basics of credit, may not have a credit card, etc. There are a few specific ideas here as well as broader general tips to getting an excellent credit score.
Get Practice as an Authorized User
Even before you’re ready to get a credit card, you can help boost your credit by being an authorized user on someone else’s account. While you’re not considered responsible for the charges, if the account is in good standing it may help your credit report. At any rate, it’ll give you experience with a credit card. Talk to your family members and see if they will allow you to be an authorized user on their account.
There’s a drawback to be aware of as well—if the primary cardholder ends up in financial trouble and can’t make payments on the card, it can affect you negatively. Make sure that the person whose account you’d like to be listed on is fiscally responsible and makes their payments on time every month.
Open Up A Low-Fee Credit Card
Oftentimes, the first step to building credit is opening up a credit card and start managing your credit. Even if you have no credit, you may be able to qualify for a standard rewards credit card. They may come with fewer benefits and a low credit limit, but you’ll be able to start building a positive track record with the card.
If you’re starting out, it’s probably a good idea to look for a card with no annual fee to reduce costs. Securing your first credit cards will add to your credit mix. It’s generally good to have a mix of credit, meaning you are managing both loans and credit cards. Furthermore, your credit card account can start to age; older accounts in good standing are a positive credit-building factor.
Before you go after them, make sure you don’t go applying to tons of different cards. Making multiple applications at the same time can actually hurt your credit score.
Make Payments Consistently
Now it’s time to start making payments on all of you debt obligations which probably includes credit cards and student loans if you’re a recent college graduate. As a young professional, your slate might be clean, so it’s very important to get off to a good start.
Successfully making payments starts with controlling your spending. You can’t pay off debt if you don’t have any money in your bank account. Cut back on expenses and try to budget for your monthly payments.
Make a note to check your balances before each due date and make payments; alternatively, you can sign up for automatic payments. Whatever you do, don’t forget about your payments!
Keep Your Credit Card Utilization Ratio Low
Also keep in mind that you can’t successfully make payments if you have too much debt. As you budget to save money for debt payments, also consider cutting back on spending with your credit card. Try using it to pay for just the bare essentials. This will make it easier to stay current on your credit card payments.
Aside from easier repayment, a relatively low credit utilization ratio is a positive credit building factor. A credit utilization rate refers to how much of your credit limit you’re using. So if you have $500 in debt on a card with a $1,000 credit limit, you have a 50% credit utilization ratio.
Most sources claim you should maintain a credit ratio of no more than 30-40%. If you exceed this limit, not only are you mired in debt, but lenders may think you are mismanaging your cards. The gist of this point is to stop yourself from overspending with credit cards.
Building credit doesn’t have to be hard, but if you go about it the wrong way, then you will only add difficulty to your situation. Maintaining credit is an important responsibility for adults of all ages, and it’s especially important that new-to-credit consumers get started on the right track.
Andrew is a Content Associate for LendEDU – a website that helps consumers, young professionals, and small business owners with their finances. When he’s not working, you can find Andrew hiking or hanging with his cats Tobi & Colby.