Future Rich: Credit 101

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So you’re in your twenties. You’re budgeting and starting to invest. You’re starting off on a strong financial foot. But you know that you should be concerned about credit. Your credit score number shows lenders you’re responsible and encourages them to give you money for the things you want like a house or car. Ready to rumble through the basics? Let’s get started.

What is credit?

Credit is a line of money given to you by an outside party to use as your own and pay back. It can come in the form of a credit card, loan or mortgage.

Your credit score is a number which banks and credit providing institutions use to see how good you are at working credit. That is obtaining it, using it, and paying it back on time.

Think of credit as a challenge. Use it, pay it. Do that enough times with enough companies and score points to improve your score. Simple, right?

What does a credit score look like?

Credit scores are numbers between 300 and 850.

300-590: needs improvement

590-640: getting there

640-720: good job!

720-850: killing the game!

How do I find out what score I have?

Many credit card companies including Wells Fargo and Discover provide scores to consumers now. See if your card provider or bank does. If not, use a free service like Credit Karma to check out your score. But BEWARE: do not frequently check your score! You shouldn’t check more than once per year. The number of inquiries on your score can negatively impact your overall number.

For this reason, it’s a good idea to get soft checks every couple months, especially if you’re looking to make a big purchase like a house where your score will come into play. A soft check does not go against your yearly inquiry number and is not 100% accurate but will tell you what range you’re in with little error.

My favorite place to get a soft check is on my can’t-live-without budgeting app, Mint (which you already know). Mint provides a free soft check every 3 months, right in the app! Along with tips to improve your score.

So I checked my score and frankly I’m afraid… How can I make my score better?

Screenshot 2016-08-18 at 3.13.17 PM

Fear not, mere millennial. We can fix up that sad little score and get you the house (and interest rate) of your dreams yet! There are 5 major categories you can earn points in when it comes to credit. Some categories are worth more than others so I’ll rank them in order of importance:

  1. Payment history: Do you pay your bills on time? Your goal should be to always pay at or above the minimum payment on time. Late? Call your card company. They may forgive you if you don’t miss often.
  2. Credit usage: How much of your total credit do you currently owe on? Try to keep your total amount owed at less than 30% of your total limits. Under 20% is even better.
  3. Age of credit: How long have you been building credit for? It’s important to not only show that you’re good with your credit but that you have been over a significant period of time. For this reason, many banks encourage 18 years olds entering college to apply for a student card. It takes 6 years to build primo credit so start out small but start out early. And don’t close old accounts just because you pay them off!
  4. Credit inquiries: THIS is why we don’t frequently check our scores. You also are marked with an inquiry when you apply for a new line of credit.
  5. Number and types of accounts: On average, you want to maintain a few lines of credit of different types. Mix it up with credit cards and loans. Ideally, you want to have 13 lines of credit over a lifetime. Don’t go rushing to open every new store card available though. Every car and home you purchase over your lifetime will count toward that number so be conservative and stick with no more than 5 cards.

I mean is a little lower score really gonna make that big a difference?

Let me give you a “for instance” provided by my friends at Investopedia.

Say you decide you’re going to buy a home of your own. Congratulations!

You go to the bank to be approved for a mortgage and have a score of 730. You receive a 3.8% interest rate loan on your $300,000 abode and pay $1398 a month.

Your friend Mike goes to the bank too but Mike’s score is 610. He is approved too! (Woohoo neighbors!) But Mike gets an interest rate of 5.39% on the same loan. His payment? Nearly $300 more than yours every month!

Over the life of your loan, Mike will pay over $100,000 more than you. Let that set in for a second. One hundred thousand dollars. I’d say that’s a pretty big deal.

Are other people my age’s scores way better than mine?

On average, this is what scores look like by age:

Screenshot 2016-08-18 at 3.07.36 PM

In that case, the average person wouldn’t be able to afford a home with a decent interest rate until their kids were buying their own homes. Shoot to be better than the average, but use these numbers to assure yourself you are just starting out (and so is everyone else).

Ready for more? Get a look at that credit score and start making moves.

And check out these other articles for more!

How I Got an Excellent Score by 22

Credit Karma Tips for Young People

Life Lessons in Credit (with awesome infographics)

Building Credit from the Ground Up

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