What you need to know about credit as you enter adulthood
What school didn’t teach you about credit and all the reasons why you need to keep a good score.
Harrison Hill, USA TODAY
Recently, I went to apply for my first real apartment, but before they could tell me whether they wanted to offer me a lease, they needed to check my credit. This scared me a little — do I have credit? Is it good? How is that determined?
I just graduated from college in May and as I learn to adult, I don’t want to make decisions that could negatively affect my credit score for years to come and potentially make real adulting more difficult in the future — like buying a house.
In my search for answers about credit, this is what I found.
What is credit?
Your creditworthiness affects so many things.
Lenders need your credit score to figure out if you should get a loan. Landlords sometimes see your credit score – or at the very least your credit report – to determine if you can rent an apartment. And some employers peek at a modified version of your credit report as part of a background check before offering you a job.
Basically, credit is people lending you money and trusting to pay it back. There are three credit bureaus that track your history with managing your credit — Experian, Equifax and TransUnion — and provide that information in a credit report. The data in the report is used to calculate your credit score, which predicts how likely you are to pay back a loan.
Credit scores range from 300 to 850. So what is a good credit score?
The major score most lenders look at is your FICO score, and this is what they determine as good or bad.
- Bad: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
You generally can check your credit report for free once a year at annualcreditreport.com, but a new government settlement with Equifax over its massive data breach in 2017 allows you to get six Equifax reports a year free for seven years.
Checking your FICO score for free is a little bit tougher because you usually have to pay for it. Discover will show you your FICO score for free every 30 days, even if you’re not a customer. Websites like CreditKarma and CreditSesame offer free credit scores, but not necessarily FICO scores. You also have credit scores per industry based on what they want to know.
According to credit expert John Ulzheimer, when you want to rent an apartment, the landlord will look at your tenant history, which has a credit score attached to it. The landlord don’t necessarily care how good you are at making your car payment, but will care about if you make your rent each month.
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So, what affects my credit score?
A number of things factor into your credit score, including:
- The type of accounts you have: The more variety of credit you have and pay off responsibly, the better your score will be.
- The length of your credit history: Consider keeping your student credit card as it helps establish a longer history.
- New credit: Just attempting to take on new credit like a credit card or car loan shows up on your credit report and can lower your score.
- How much you owe: You want to keep a low balance on your accounts and only use a small percentage of your credit limit.
- And most importantly, your payment history: Whatever you do, make your minimum payment on time. FICO places a 35% weight on payment history
Things that negatively impact your credit score include: Applying for too much credit in a short amount of time, missing or making late payments, and having your debt sent to a collection agency.
Keep in mind, your credit score can change based on these factors, so if you have bad credit now, it can improve if you make your monthly payments and keep a low balance on your accounts.
Tips for good credit
Trying to figure out everything that goes into your credit score can be like solving a Rubik’s cube, but experts have some advice for how to start out of the gate with good credit.
“If people lather, rinse, repeat what I’m about to tell you, they will never have a bad credit score,” Ulzheimer told me:
- Make every payment on time without exception.
- Never charge more than 10% to 20% of your credit limits.
- Only apply for credit when you actually need it.
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Terry Griffin, vice president of marketing and global consumer solutions at Equifax, suggests checking your credit report regularly to see what information is being reported to the credit bureaus. She says starting with good credit behaviors, such as making payments on time, will help build good habits:
“This doesn’t just include credit cards, as late or missed payments on other accounts, such as cell phones, may be reported to the credit bureaus, [and] also can impact your credit score. Don’t skip payments, even if you’re disputing a bill,” Griffin said.
Griffin also encourages us to build an emergency fund — ideally six months worth of living expenses — so we don’t have to rely on credit cards in times of need, potentially putting us in debt.
Interest: Interest is the cost of borrowing money, whether it be student loans or a mortgage. In addition to paying the loan back, you also have to pay interest back, which is determined by the interest rate.
Interest rate: Interest rate is the percentage you have to pay on top of paying back the loan. It is determined by how risky it is you give you the money and often based on your credit score.
APR: This stands for “Annual Percentage Rate” and it includes interest plus other fees such as a broker fee and other closing costs. APR is expressed as a percentage and is the best way to compare the cost of loans because you can see all the associated fees.
I know it’s a lot and it can get pretty confusing, but people have been adulting for a while now, and if they can do it, so can we.
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