Two small words cause many people my age lots of anxiety: credit score.
I think it’s such a scary idea because it’s mostly misunderstood. I hope to share what I’ve learned over the past couple of years and my plans for continuing to grow my creditworthiness over the next few years.
What is a credit score? It’s a rating you get based on your past purchases and records of paying bills. It shows companies and lenders whether or not they should take the risk in lending you money. If you pay things back on time and show that you are reliable, they give you a higher score. If you are “delinquent” with payments or have debts, you will have a lower score. This can hurt you in your future.
I have had my credit score checked twice in the past two years. Once, when buying my first car, and again when looking to apply for a loan to buy our first house. This all sounds (and feels) very grown up and if you’re not in the market for cars or houses, this may seem very far away for you. But, don’t click away just yet. Even if you’re not making these grand purchases or looking to borrow money, your credit score is much more important than you think.
Part of financial stability, success, and planning is having a high credit score. It allows you to buy things you can’t pay for all at once, but may need immediately, like a mattress. In some states, having a low credit score may prevent you from getting the job you want. It can also prevent you from getting good insurance rates or coverage at all.
I recently found out that when a couple wants to purchase a home, the mortgage lender takes the lower rate of the two. And, I found out that many lenders don’t give loans to people with a score below 630. That’s not that low.
1. The first step is getting a credit report done.
All Americans are allowed one free credit report per year. The majority of people our age, however, either don’t know that or they aren’t bothering. This is a very important step for two reasons: you can see where you are (take a deep breath) and you can also see if you have any errors on your report.
It happens more than you would believe – the credit rating agencies make loads of errors and are quite slow to correct them. There was a landmark lawsuit in September 2016, actually, that puts the onus of correcting these errors on the agencies, not on you. Seems like it should have been that way all along, doesn’t it? But, you can’t dispute what you don’t know. So, get that report done – it’s free!
2. If you have utility bills, pay them on time every month.
Each time you have a late payment, it hurts you. Yes, even one.
3. The same goes for credit cards.
A good trick a friend of mine shared with me is that she makes all her purchases on her credit card and immediately pays it off every month from the money in her checking account, making sure to never spend more than her balance.
4. Start a savings account.
Think of credit reporters as looking at you as a balance sheet. All the debts you have are probably in red font in one column and all the assets you have are in black and in another column. Eventually, you want to wipe out the red with the black, but for now, try to put more in the black when you can.
5. Paying off loans on time.
Paying your student loans or other loans you have (credit cards count, car payments) on time will also help you. Each payment, try to pay more than the minimum requirement if possible. This will help you rid yourself of overbearing loans and will increase your score with every payment you send in.
You are the only one who has the power to increase your score. The younger you know about it, the better. But, don’t let the importance of a credit score intimidate you. If you are willing to take on a loan or start a credit card, it will actually increase your score over time. Once it’s up, it’s not a prize to be sheltered, but something to be nurtured and grown. Doors can close if you have a bad score – don’t put yourself in that position. Arm yourself with knowledge and start taking steps now to ensure those doors stay open for you!