You can think about your credit score as your business card in the relationship with financial institutions. It’s a number that sums up just how careful with money and trustworthy you can be. Of course, it can be heavily biased by some mistakes in the past, going back as much as 7 years, but it is still a good proxy.
If you have been careless so far or are just entering the adult world of money and worries, here is a simple guide to having a stellar credit scorewith minimal sweat.
1: Get a credit card
The best way to build credit quickly is to apply for a credit card and plan to use it wisely. If you never had a credit card before, you can get a secured card, which is an intermediary product betweena debit and a credit card. Practically, your credit limit is equal to the amount you put on the card, but you have the responsibility to repay whatever you spend within a month.
If you want to get a head start before your graduation and be ready to apply for a mortgage when you are out of college, you can try a student card or ask one of your parents to act as a co-signer. Beware, in case you default the co-signer is responsible for your debt.
2: Be diligent with payments
To win the FICO score game, you need to understand how it works. The bulk of it (35%) consists of your payment history. Any late payment can hurt your score for years, especially if the delay is over 60 or 90 days.
The best way to be on time with your financial duties is to automate your payments and be sure you always have enough money on your account so that you don’t miss any deadline. Since the FICO takes into consideration all debt categories,you need to keep an eye on all your obligations, not just the credit card or student loans.
3: Aim for 0 balance
The next important category (30%) of your FICO consists of the amounts owed compared to your available credit. Try to keep your utilization ratio below 30% each month and even pay all your balance in full to start with a clean slate each month.
Pushing your spending limit to the maximum and making minimum payments shows bad money management and could be a warning sign for your lenders.
4: Be thrifty
By all means, once you get a credit card use it, but don’t abuse it. Ideally, start by putting on your credit card the payments that you need to make anyway. This includes bills and groceries. Don’t swipe the plastic for anything just because you have it.
Also, don’t get too many credit cards just to increase your limits and get into more debt. It’s OK to have two credit cards and maybe a particular card from a favorite retailer, but more than that can get you into unhealthy spending.
5: Know your score and keep it under control
Last but not least it’s a good idea to periodically check your credit score to see how your efforts are paying up. Also, this is a way to ensure no mistakes are made. If you see any sudden changes be sure to check your detailed report and identify the source of the penalty.
If you have missed a payment and it shows on your credit score, but it was an honest mistake you could attempt to try and ask the company to remove the debt once you’ve paid it in full.