July 23, 2024
How do I build a credit score? It’s not that difficult, if you follow these rules.

How do I build a credit score? It’s not that difficult, if you follow these rules.

April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.

Unhappy with you credit score? Looking to buy a house? You’ve come to the right place.

There are five big factors that play into your credit score, according to Freddie Mac FMCC, +0.32% :

  1. Your payment history.
  2. The amounts you owe.
  3. The length of your credit history.
  4. New credit you apply for.
  5. The types of credit you use.

For Financial Literacy Month, MarketWatch spoke to TransUnion’s TRU, +1.60% head of consumer education, Margaret Poe, who helped demystify some of the common issues during a Barron’s Live webinar. (You can read our previous installment from that conversation here.)

Payment history — whether you pay your bills on time each month — is the “single most important factor across almost all of the models,” Poe said.

“A good rule of thumb is to keep credit utilization at or below 30%.”

Poe also noted that the credit-utilization ratio is a big factor that influences your credit score. “This is really just a calculation that shows all of your total available credit, and how much you’re using at a given time,” she explained.

If a person has a $1,000 credit limit and buys a $900 TV, for example, their utilization rate is 90%. That “shows lenders that, whoa, you’re getting close to the top,” said Poe said. That likely makes you more risky in the eyes of lenders.

A good rule of thumb is to keep credit utilization at or below 30%, Poe said. 

Having a healthy mix of credit is good for your credit score. “If you have a student loan and a car loan and a credit card, that shows you are balancing both installment and revolving debt,” Poe explained, “and that can be a good thing.”

What are lenders looking for?

Lenders use credit scores to see if you’re a prudent and responsible borrower. But they assess you differently based on whether you’re taking out a car loan or a mortgage.

A home is likely the biggest purchase most people make in their life.

“Having a healthy mix of credit is good for your credit score.”

If you are preparing for any kind of a big purchase? “Start making sure that you’re monitoring your credit,” Poe said.

After making sure it’s accurate, check if there’s a freeze in place on your credit report. People sometimes have their reports frozen if they were victims of identify theft, Poe said.

“If you have a freeze on your credit, and you’re at the dealer they will not be able to prime your credit to potentially give you that loan,” she added.

If you’re not happy with your current score, what can you do to quickly boost it?

Poe recommended against following popular advice from social media that recommend quick-fixes to boost one’s credit scores.

“It’s kind of a bummer, but it’s true. But the good thing is that actual things you can do are pretty straightforward and you can start doing them right away,” Poe said.

From paying bills on time, and keeping a close watch on your report, not applying for too much debt, keeping your credit utilization low, there are many ways people can stay on top of their number, POe said.

But if someone’s in the market for a mortgage,look at getting pre-qualified or pre-approved for a mortgage, she said, instead of scrambling to finish the paperwork after deciding on a listing.

What’s the best way for under 18s to build a credit score?

For those people early in their financial lives, there are a few ways to get set up for success when it comes to credit scores, from latching onto your parent’s credit card, and trying out a secured card.

One of the biggest ways to get a leg up is to get added as an “authorized user” to your parents’ credit card. For instance, if you are going to high school and have an authorized card, it “essentially allows student to absorb some of the positive credit history of the primary user,” Poe explained. 

“If your parent had had a credit card for 10 years and you’re an authorized user, then you get some of that halo of having 10 years of positive history on the account,” Poe added.

But it’s important for children not to abuse that trust, and be responsible in paying off the card. By the same token, if a parent is irresponsible and doesn’t pay off the debt each month, that also sets their child up for a tough road ahead to get to a good credit score.

A secured card is another option. “A secured card is almost like a hybrid of a debit card and a credit card,” Poe explained. You deposit a cash security deposit, which is typically the same amount as your credit line.

After building a good credit history, you could move to a card with higher limits, or better rewards.

“It can be a really good option, especially if you’re having trouble getting approved for credit because you’re starting out from scratch,” Poe said. 


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