Building credit can be confusing and scary, especially if you’re trying to do it independently. There are plenty of resources available to you online and in print, but there’s no substitute for getting advice from someone who has already been there and done that.
Here are eight facts about building credit that will make your hair stand on end and blow your mind simultaneously!
1: t's Start With Some Defining Terms
Although it’s called credit, a credit score isn’t a type of loan. Instead, your credit score is a number that’s generated based on information in your credit report and used to determine how likely you are to repay an obligation. Most lenders will want to see at least a good credit score before they extend any financial assistance, so it’s important to know exactly what these scores mean. Here are some facts about building credit that might blow your mind.
2: What is your FICO Score?
The one-number score lenders use to decide whether you’re a reasonable credit risk. If you’ve ever applied for a credit card, a car loan, or a mortgage, your lender checked your FICO Score before making a decision. If you want to know what it is, here’s how to find out. Each of us has an individual FICO Score that can range from 300 to 850. In general, a score in the high 700s and above will get you lower interest rates on loans—which makes sense because banks don’t like lending money to people who won’t pay them back. But if your number is too low (below 620), you might have trouble securing any credit at all, and you might pay more money over time.
3: Understand Why Bad Debt is Bad
Before you start worrying about whether you’ll ever find a credit card company willing to issue you a credit card, make sure you understand why bad debt is bad. Most people think it’s because of interest rates and fees—and that’s part of it—but if your goal is to build up your credit score, understanding how and why things like late payments and high-balance utilization damage your score will help you stay on track.
4: Good Debt is Good
More often than not, debt has a bad rap; it’s seen as something that should be avoided. And while many forms of debt are indeed detrimental to your financial health (excessive credit card debt is never recommended), there are some instances in which good debt can help you build your credit. For example, some student loans allow you to opt for an income-based repayment plan, which will automatically adjust your monthly payments, so they’re more affordable based on your salary. If you’re trying to build your credit and own a car, auto loans and mortgages (interest rates may vary) also count toward your score—and taking out these types of debt can be highly beneficial if done responsibly.
5: Be Aware of Lenders' Tricks
Keep in mind that whenever you’re dealing with a lender, particularly when looking to take out a loan, be it for business or personal purposes, there’s a good chance they’ll try to pull some tricks on you. Check your credit report regularly and be aware of any inconsistencies. If you believe there is an error in your statement, send a dispute letter to each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. They must investigate if you file a dispute within 60 days of noticing a discrepancy.
6: Understand How Banks See Your Applications
When you apply for a credit card, you may assume that your application is being taken seriously. However, if you’re new to credit or have a bad payment history on your report, banks may see your applications as attempts to game their system and build up their profits. Some people claim that too many credit card applications in a short period hurt their scores. Since it can be challenging to know what each bank considers an excessive number of applications in a short amount of time, consider using your wallet well instead of relying solely on cards. Get only what you need at any given point—and then pay them off quickly—instead of trying to rack up credit with multiple cards. You might find that it makes more sense to use one well-managed card rather than several poorly managed ones.
7: Know Which Factors, Count Most
Many factors can influence your credit score, but there are two main credit-scoring models in use today. The first is FICO, which is used to determine scores for about 90% of lending decisions. FICO scores range from 300 to 850. A higher score means you’re likely to pay back your debts on time, so lenders will give you a lower interest rate or better terms on whatever they’re loaning you money.
8: Get Approved Today!
It’s time to build credit. While that may seem like a daunting task, it doesn’t have to be. You can start building credit in several ways, but a secured credit card is one of the best ways. Secured cards are available to anyone—whether you have bad credit or no credit at all—and there are some out there that offer great rewards and low-interest rates. Compare secured cards for yourself below!