Why is everyone so worried, does your credit score even matter?
Everyone seems to be so concerned about building and maintaining a good credit score. As a teenager, you may be thinking “Why is everybody so worried about credit anyways?” I mean, just buy what you need when you have the money for it, right? Wrong.
That was my exact line of thinking as a teen too. Let’s just put this into perspective. Without decent credit, you’re going to struggle getting approved for loans, which are almost always required for life’s larger purchases such as a home or a car. Having bad credit can haunt you and make significant purchases near impossible. Having no credit (the case of most teenagers) is essentially the same. Without credit history, a lender wouldn’t know how much of a risk your loan would be. But fear not, as a teen you have time on your side – the most powerful weapon in credit building. These things may not be on your mind now – which is okay, but they should be and we’re here to help.
Raising your credit score is not as difficult or scary as it may seem. However, it’s not going to happen overnight. You just want to focus on being patient and proactive, as well as using your available resources – like us! First you’ll need to understand how credit works. Then you can start establishing credit-healthy habits and staying up-to-date.
How is Credit Calculated?
There are several different credit scoring models, each with distinct criteria and ranges. The three major national credit bureaus are TransUnion, Equifax, and Experian. Most lenders will use the FICO scoring model for determining credit approvals, though. “Four scoring models, different methods – how will I ever know where my credit stands?” No worries – even though there are differences among these scores, the principles are constant. There are five elements that determine your credit score. Different companies may not weight them the same, but they all still matter.
1) Payment History – 35%
The most important factor of your credit in the eyes of FICO is payment history – your ability to repay debt. This of course makes sense, a lender wants to be certain that they will be repaid. If you’re trying to raise your credit score this is essential. Regardless of what may have happened in the past, today is a fresh start. Get organized and make a budget to manage your spending, avoid borrowing more than you can pay back, and start a streak of on time payments that boost that score up!
2) Credit Utilization – 30%
Next up is credit utilization, but what does that mean? This is how much of your available credit (max amount) you are using at any given time. For example, if your total available credit, across all accounts, is $4000 and your current balance (amount owed) is $1000, you have a 25% credit utilization. Keeping this utilization low will help raise your credit score, but don’t be afraid to use credit. Not using credit at all won’t help you either.
3) Age of Credit – 15%
This is where patience comes into play. You won’t achieve that perfect score you want without a few years of solid history under your belt. Don’t open an account just to let it sit though, because time since an account’s last transaction is also considered here. So avoid letting any accounts go stagnant and just try to be patient. It’ll be easy, time only goes faster from here (just ask anyone older than you).
4) Credit Mix – 10%
Also referred to as “credit diversity”, a full credit mix may be hard to achieve as a teenager. You typically don’t see many teens taking out mortgage loans and financing their own vehicles, but that’s okay. Having a solid payment history, growing credit age, and a record of low credit utilization will compensate for this. You could consider a retail store card, a credit card through your bank, a secured credit card, or even your first auto loan, but don’t rush into it.
5) New Credit – 10%
This can be interpreted in a number of ways, but being only 10% of your score’s makeup, this isn’t anything to stress about. Essentially, you can’t sit on the same accounts for too long, but you also want to avoid applying for too many new accounts within a short period of time. Applying for a new line of credit every few years should do the trick, although some recommend as often as every 8 or 9 months. In the youth of your credit life as a teen, there’s no need to put much emphasis here. You’re much better off on focusing your efforts to budget and not overspend, as well as getting to truly know yourself and your spending habits.
In with the Good, Out with the Bad
Now that you have a better understanding of how credit works, how can you use this knowledge to your advantage? Well, it depends on where you stand right now with credit. If you have no history whatsoever, you’re starting from the ground up – just focus on pumping in that positive credit history. Just know that you won’t raise your credit score instantly. Consider treating the five pieces of a credit score as rules or goals to hold yourself to. Building credit and raising your credit score is all about balance, much like everything else in life. Spending within reason, planning your moves strategically, and maintaining a positive outlook are the keys to success.
If you’ve already started establishing credit you’ll have to take a look at what’s already there as well. You can request your credit report from each of the three major credit bureaus once a year for free by visiting AnnualCreditReport.com. What if you do this and something just doesn’t look right? You are able to dispute any inaccurate negative items on your credit report and potentially get them removed. There are several services that can help guide you through this process. Some of it you may be able to DIY through letters to the creditors from which the derogatory items come.
Monitoring Your Credit
So now you understand your credit, you’ve removed inaccurate items, and have started a history of positive credit. You’re all done right? Sorry, no you’re not. Your credit score isn’t something you should obsess over. There’s no need to check scores daily – in fact fluctuations are normal and you’ll only end up freaking yourself out every time you’re on the low end of that fluctuation. However, it’s a good idea keep tabs on it and continue to strive for excellence. The good news is, there are plenty of resources and tools to help along the way.
- Utilize your free credit report each year. This annual update will allow you to identify anything you could potentially remove, and showcase how things have changed year over year.
- Credit monitoring tools like Credit Karma are great for quick snapshots of your credit health, highlighting potential opportunities, and advice on how to improve.
- Credit repair services such as Lexington Law can assist you with removing the negative and inaccurate items on your credit report that could have been mistakenly added.
Time is on Your Side
With this knowledge you can successfully raise your credit score and solidify a positive history. Stop thinking about how to increase credit scores quickly and look to the future. If you’re a teenager and reading this, you’re far ahead of the majority of your peers. Keep it up – this could provide a very comfortable future in comparison to others.