When someone leaves home and starts off on their own, one of the first financial obstacles is a lack of credit history at the three credit agencies.
This is a big problem because:
- Many jobs require you to have favorable credit
- Many landlords require credit to become a renter
- Many insurance companies review your credit to determine how much to charge
- Many utility companies require credit to open an account
- Many lenders will charge the highest rates for no/low credit scores
The three large credit rating agencies evaluate your credit history to create a single number to provide potential lenders a simple overall score. This overall score indicates how reliable you’ve been in paying your lenders back and on time. The credit rating scale ranges from 850 (perfect) down to 300 (horrific), and your target is to maintain an excellent credit score of 760 or above. If your credit score falls below 760, then you are likely to have to pay higher interest rates, higher insurance rates, because your score indicates you are more likely to default. If your credit score falls below 650, this is so low that it is unlikely any company will grant you credit.
A credit score is based upon 5 main categories:
- Do you make credit payments on time?
- How much debt do you have compared to your credit limits? The lower this ratio is, the better your score.
- How long you have had a credit account open?
- The variety of credit history, the more the better: store credit card, car loan, installment loan, credit cards, lease, home mortgage, etc.
- Recent, high-frequency of loan applications – indicates that are you desperate for money right now and possibly in a financial crisis.
The easiest way to build credit history is to get a credit card, use it for routine purchases, and always pay the full balance each month. By paying the full balance on time, you will never be charged interest or penalties. Since you’ll want to keep this account open forever, do some homework to determine which kind of credit card benefits appeal to you the most: airline miles, hotel points, restaurant points, cash back (my favorite), etc.