I held my breath and crossed my fingers as I hit the little blue button: “Check My Score”. This wasn’t a test result, but it was equally—maybe even more—important. For the first time, I was checking my credit score.
What’s a credit score and why should I care?
If you want to move into a new apartment, open a credit card, take out a car loan, or even get a new cell phone contract, your credit score and credit report determine your options.
Think about your credit score like a financial GPA, and your credit report like a school report card. The more responsible you are with money, the higher your score. Your credit report provides a more comprehensive assessment of all your credit-impacting activities.
Credit scores are often referred to as “FICO scores”, named after the original and most popular credit scoring company, “Fair Isaac Corporation”. When you hear “FICO score,” think “credit score”.
FICO scores range from 300 to 850. The median score for Americans is about 695; 800+ is exceptional. If your score is below average, you might be faced with higher interest rates on loans and have fewer choices of credit cards. But no matter your score, it’s always possible to improve!
There are tons of ways your credit score affects your life, even when you’re young:
Apartments: Want to apply for an apartment? Your credit score is super, super important! Landlords almost always require a credit report as part of your application. They’re checking for things like if you’ve ever missed paying a bill, or if you have a lot of debt that might keep you from paying rent on time.
Private student loans: A high credit score indicates that you have a reliable track record, so people with high scores can usually secure lower-interest loans. Since repaying student loans can take years, lower interest rates can translate to thousands of dollars saved.
Credit cards: Whether it’s for the reward miles or to start building credit, there are lots of great reasons for using credit cards. Your credit score determines what kind of card you can get, your credit limit (or, how much you can charge before “maxing it out”), and your interest rate.
Car loans: If you have a very high score, you may be eligible to receive a loan at 0% interest. A very low credit score can lead to a very high interest rate, though, and taking out a high interest loan will cost you much more in the long run.
Car insurance: A lower score makes you a “higher risk” customer and means higher insurance rates.
How do I check my credit score and credit report?
You can access your free credit report at AnnualCreditReport.com with just your personal details and social security number. Each of the three major credit bureaus (Experian, TransUnion, and Equifax) is required to give you one free credit report every 12 months. You can check them all at once, or get one credit report every four months, rotating through each credit bureau.
You can get a free estimate of your credit score on Credit Karma but this isn’t always as accurate as an official FICO score, which you can buy at myfico.com or get for free through your bank or credit card. Companies that often provide this service include American Express, Bank of America, Citi, Discover, and First National.
If you notice inaccuracies, dispute them with the credit bureaus so the errors don’t mess with your score.
Because I travel a lot, my first credit card was a travel rewards card. I knew that I wanted a card with rewards for travel spending and an airline miles sign-up bonus. Later, I signed up for a credit card with major cash back rewards for groceries—my second biggest monthly expense. Some credit cards offer cash back or extra points for spending on gas, Amazon, or even clothing stores!
If you have the funds to pay off your balance and know you can spend responsibly, a credit card is an easy way to start building credit. On the other hand, if you know you’ll have a hard time paying off your balance every month or you have a habit of overspending, a credit card may not be the best choice for you right now.
Choosing a credit card may seem complicated and overwhelming, but with just a little research you can save yourself from unnecessary fees and high interest rates—and access rewards, membership benefits, and particularly great customer service! My favorite sources for information about specific credit cards are Nerd Wallet and CompareCards.com.
If you’re opening a card for the first time, many banks offer student credit cards that accept young people who have a shorter credit history. You can also look into secured or prepaid credit cards. Secured credit cards can impact (and help boost!) your credit score, whereas prepaid credit cards will help you get in the habit of paying your bill without impacting your score. To each her own!
How can I improve my credit score?
If you’re young and don’t have a long credit history, you may have a lower credit score even if you haven’t done anything “wrong.” But your score changes constantly, and there’s plenty you can do to improve in the short- and long-term.
Credit scores are not an exact science, but there are five main categories that make an impact (and you can improve in all of them):
Payment History (35% of your total credit score)
This category is both the most important and the easiest to boost. Basically, if you make credit card, loan, and bill payments on time, you can achieve a near perfect grade in this category. There are a few specific ways to improve:
Pay all your bills on time, every time. Late rent, loan, or credit card payments can all show up on your credit report and negatively affect your score. Set a Google Calendar reminder or put your bills on auto-pay to build a healthy payment history.
Pay your credit card balance in full every month. The best way to improve your credit is to pay your entire balance off when it’s due. You may have heard that carrying a balance helps build credit—this is incorrect! Plus, you end up paying interest, and nobody wants that.
Credit Utilization (30%)
Keep your “utilization”—or, the percentage of available credit you use—low. Never max out a credit card. If your credit card limit is $1,000/month, for example, try keeping your credit card bill in the low hundreds every month. 30% utilization is a good rule of thumb, and lower is better.
On the other hand, you need to actually use your card to build credit! 0% utilization is not ideal. If you have a credit card, but never make any charges (and therefore never make any payments), you’re not building credit. If you’re worried about overspending, try putting one recurring payment on auto-pay, like Spotify or a gym membership, and then leaving the card at home.
Length of Credit History (15%)
The longer your credit history, the healthier your score. Don’t beat yourself up if you don’t have much of a credit history yet. This is normal for younger adults, and something that you can easily remedy by getting started today. If you haven’t started building your credit, now’s the time!
New Credit (10%)
Opening a bunch of credit cards or taking out a bunch of loans all at once will make a negative ding on your credit score. That doesn’t mean you should avoid getting a credit card—just be mindful of how frequently you apply for a new or additional card. You can keep your credit score up by spacing out how often you apply for a new card.
Similarly, the act of requesting a lot of credit reports—or having somebody else request a report on your behalf, like a potential landlord—will slightly lower your score. These minor blips on your report will go away relatively quickly, so don’t stress if you have to provide a credit report. You can avoid this issue by saving copies of your credit report to reuse for apartment applications.
Credit Mix (10%)
For now, you might only have one or two lines of credit show up on your credit report—maybe student loans and a credit card. Eventually, your credit score will benefit from having a mix of credit—things like mortgages, auto loans, credit cards, etc. Don’t take out loans just to improve your score—debt for debt’s sake isn’t good for your overall financial health.
Since that first time I checked my credit score online, I’ve improved my score with just a few positive habits—mainly paying my credit card bills and rent on time. Today, I know I can apply for apartments and credit cards with confidence. Plus, my good habits will help me get a good deal on a mortgage and car down the line.
What are you doing to boost your credit score? Tell us below in the comments!
Read more on personal finance at Katie’s website, MoreMoneyFor.Me.