A credit score above 800 is exceptional. Individuals with a credit score above 800 get the best rates on mortgages, are more likely to get approved for higher credit lines, and an easier time finding an apartment willing to rent to them.
I applied for my first card in college because I knew building a good credit score would take time. Back then, I was rejected from all the big name banks because I had zero credit history! Now, I have a 800+ credit score and am often pre-approved for deals. If you’re currently a high school or college student and you’re thinking of building your credit early, banks have now rolled out cards catered specifically to young adults. Regardless of how old you are, this article will give you a few ways you can immediately start building up your credit.
To begin with, here are the components that make up a credit score, aka a FICO score:
Payment History (35%): This is the single most important factor affecting your credit score. Never miss a payment on your card. Set reminders, or if you’re sure your checking account has enough money in it at all times, set up automatic payment on your cards. Keep track of all the cards you have and monitor them regularly. If you pay your balance reliably over time, your credit score will climb without fail.
Credit Utilization Rate (30%): This is probably the easiest way to raise your credit score quickly. Credit card companies hate risk: if you have a card with a $5,000 limit and you’re hitting $4,500 every month, companies see you as a potential risk and over-borrower, even if you pay off that balance reliably every month. The sweet spot is using no more than 30% of your total credit each month. So if you have a $5,000 limit, spend no more than $1,500 tops. You can balance out the ratio by either spending less or applying for another credit card/applying for a credit limit increase, both of which will decrease the fraction of total credit you’re using. But don’t apply for a bunch of cards you don’t need just to decrease your utilization rate, as that will affect the New Credit portion of your credit score.
Length of Credit History (15%): A great way to building a good credit score is starting to use credit before you need it. The longer you’ve had a credit history, the more reliable you seem to credit companies. Who are they more likely to lend to: someone who’s paid off their balances for a year or someone who’s paid off their balances on time for ten years? Even if you don’t use it often, having a credit card sooner than later will start increasing the length of your credit history. It’s never too soon to start on your finances.
New Credit (10%): Taking out a bunch of loans or applying for several new credit cards is a red flag. It’s a sign that you might be experiencing financial hardship and decreases the likelihood that you can pay off all of your obligations. Space out your applications and be sure to keep track of all of the loans you take out and when they are due.
Types of Credit (10%): There’s revolving and installment credit, and they work differently. Credit cards are revolving credit – there’s no end date on when you stop borrowing/paying money, every month your credit limit refreshes, and you pay it off as you use it. Car loans, mortgages, and student loans are types of installment credit. You borrow a lump sum amount and make regular payments towards your loan until the loan repayment date.
I’m an authorized user on my parent’s account? Will this affect my credit score?
An authorized user is someone who is allowed to use a credit card to make purchases but is not liable for any payments due on the account. It can be a good way to immediately start your credit history and build credit. However, if the primary owner fails to make payments, they can hurt both their own and the authorized user’s credit score, so be careful! Also, being the primary owner of a credit card will help you build credit quicker than being an authorized user would.
Here’s What I Recommend for Building Your Credit Quickly:
- Apply for a credit card as soon as you’re 18, even if you don’t have plans of using it.
- Become an authorized user on your parent’s credit cards, if you can.
- Use no more than 30% of your total credit limit, and be sure to make payments on time. Never carry over debt to the next month, always pay off the balance in full if you can.
- Don’t close any unused accounts, this decreases your credit utilization and can hurt your credit score. Just leave it untouched and make sure to not accidentally charge credit to that account.
- If you do have loans, pay off in full the loans with the highest interest rates first. Having loans isn’t a bad thing (they increase the types of credit in your credit history) so long as you can manage them carefully.
- Monitor changes in your credit score, either through your credit card provider or some third party service. I personally use Mint, and can vouch for it.
- Shop around for the best credit cards with the best rewards specific to your needs.
Everyone has their own starting point, but it’s not a competition. Building credit is like building trust with someone that can see nothing but your payment history, and it takes time. Manage your spending carefully and save yourself some money by getting the best rates on your loans.