Establishing Credit
Learn more about credit, how to establish it, and why it's important.
Understanding Credit and why it's Important
Credit gives financial institutions insight of how risky you are to them as a borrower. Essentially, if a credit union or bank were to lend you money, credit tells them how likely it is that you will pay them back. A higher credit score is seen as a lower risk and a lower credit score is seen as a higher risk. When you have a higher credit score, not only are you more likely to get approved for loans or credit, but you also may get a lower interest rate or might not be required to put as much money down.
Aside from financial institutions, there are many other places that might check your credit: Employers, landlords and leasing companies, utilities, and others. This is another way for them to gauge your responsibility. If someone has a low credit score due to things like late payments, collections, or a recent bankruptcy, it’s possible for employers not to hire them, rentals to not be approved, utility companies to deny service, and insurance companies to charge higher premiums.
Common Questions About Credit
There are two different credit scoring models: FICO Score and VantageScore. The FICO Score is the one most commonly used in consumer lending. Below are the different factors that go into calculating the FICO Score and how much of the total score they account for.
35% - Payment history
30% - Utilization (amounts owed)
15% - Length of credit history
10% - Hard inquiries (new credit)
10% - Variety of accounts
The FICO Score ranges from 300-850. A good credit score is one that is anywhere in the range of 670-739. Having a good credit score means you’re more likely to get approved for loans or credit compared to someone with a lower credit score. Remember though, having an even higher score means you may qualify for lower interest rates. The rest of the credit score range is below.
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Exceptional
There are several ways you can establish credit:
· Open up a secured or unsecured credit card
· Become an authorized user on someone else’s credit card
· Open up a credit builder loan
· Get credit for rent or utility bills you pay
Overall, opening up an unsecured credit card in your own name is the best way to establish credit in the long run. This type of account can help with several of the FICO Score factors: it can show on-time payments, low revolving utilization, a (long) credit history, if kept open, and a different type of account than a loan.