Establishing Your Credit
Do You Know Your Score?
Do you have a credit history? In other words, do you have a credit card or have you ever taken out a loan in your name? If so, that's great —it’s a start. But, have you ever checked your credit score? A credit score is a three-digit number between 300 and 850 that rates your financial history, also called your FICO (Fair, Isaac and Company) score which is a branded version of your credit score. It is the most commonly used score by banks and credit unions to make credit and loan approval decisions. Knowing your credit score is important. Not only is this number critical to being approved for loans, drastic changes in your score can also alert you to inaccurate charges or potential identity theft.
Checking Your Credit Score
There are three nationwide credit reporting agencies: TransUnion, Experian and Equifax. It is important to know your FICO credit score from each. Every agency pulls your personal details from its own database, and if one has outdated or incorrect information, it can affect your score from that agency.
Although you have to pay to know your actual scores, you are entitled by law to receive one free credit report every 12 months from each of the three agencies. Your credit report will show an itemized list of activities, such as activated credit cards and loans that affect your score. Go to annualcreditreport.com to request your report.
When you pull a credit report for yourself or pay to check your score, or another organization pre-approves you or verifies employment, it is known as a “soft pull,” which has no impact on the score itself. When another organization, such as a bank or car dealer, approves you for a loan or credit card, however, it’s called a “hard pull.” Hard pulls can lower your score very slightly, but the effect only lasts for one year.
Establishing Your Credit History
Your credit history is important because it shows future lenders that you have a history of responsible credit use. The earlier you start building your credit history, the easier it will be to qualify for loans in the future.
One of the most common ways to begin building credit is to get a VISA credit card. You can often get a credit card with no credit history, though your parents may have to co-sign. With a credit card, you charge purchases to your account, and at the end of the month, you receive a bill for the balance of the charges you made. If you choose not to pay the entire balance, you can make a minimum payment and carry a balance from month-to-month — paying interest on that balance. To begin building a strong credit history, it's a good idea to occasionally charge purchases to the card, and then pay them off as quickly as possible.
Student loans, installment loans such as auto loans, and personal lines of credit can also help you build credit. While a credit card is a great start to building credit, diversity of credit is important for getting qualified for a mortgage, since lenders consider both your score and the makeup of your credit history. If you can demonstrate responsible borrowing in multiple ways, you will increase your chances of being approved for a loan.