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As many of you know I worked at a major financial institution for over nine years before I quit to stay home with our Daughter. I started working there when I was 18. The things I learned while working there will stay with me forever, and that is a huge blessing. I recommend any one and everyone to work at a financial institution, not only for their awesome hours but for the knowledge you gain working there. Over my many years there, I helped people with no credit build to a great credit score. I also helped people with awful credit become ideal candidates for lending. There is so much information out there for new borrowers. Building credit from scratch as a new borrower can be tricky, below you will see my recommendations.
If you are curious how you can easily build your credit score check out this post.
Why Credit Is Important
In order to build credit, it is important for you to know why credit is important. Good credit is not only essential for qualifying for big things like a car or a mortgage, but it is also essential for small things like renting a car, getting a job, phone services, even landlords pull your credit in order for you to rent their place.
It may not seem important now but in the future you may see your self wanting to shape your life into something more. It is important for you to start right the first time.
Understanding What A FICO Score Is
What is a FICO? The term FICO stems from the company’s original name, Fair Isaac Co. They later shortened their name to FICO. This company uses information from the 3 major credit bureaus, TransUnion, Equifax, and Experian, to calculate a FICO score aka a credit score. FICO score is a 3 digit score ranging from 300-850. The higher the FICO, the easier it will be for you to qualify for a loan in the future. High FICO scores show low risk. Just know that building a high credit score will take time.
What Makes A Credit Score & Recommendations To Get You There.
Payment History– payment history makes up for 35% of your credit score. This simply shows if you currently make on time payments or if you don’t.
- My Recommendation: Pay your payments on time every time. If you can pick your due dates for your loans, spread them out between pay periods. This way not everything is due at the first of the month leaving you with no money until the next check. Which may just cause you to be tempted to put stuff on credit cards, which you want to avoid.
Amounts Owed– Amounts owed makes up for 30% of your credit score. This pertains especially to credit cards. Lenders love to see high limits to low balances. It lets them know you aren’t relying on that limit to survive. If you take your credit card over half of your credit limit, it starts to affect your credit score in a negative way. If you take your balance to 80% or above your limit, it hurts your score even more.
- My Recommendation: A lot of people tell you to make small purchases on your card and pay it off every month. Which is great, it helps build good habits. The trick to this is to avoid going over half of your credit limit. I recommend finding a card WITHOUT AN ANNUAL FEE, that you don’t have to use in order to build credit. SERIOUSLY. Activate the card and then shred it. As a first time borrower, your limit is going to be small anyway. You can always increase it overtime to increase your score more down the road.
Length of Credit History– Length of credit history makes up for 15% of your credit score. Anything less than 18 months is considered new credit. While you do have new credit, don’t go crazy and open a ton of things.
- My Recommendation: Open up to 3 trade lines and let them sit for at least a year if you can, or longer, to establish credit. An example of three trade lines could be but not limited to, a car loan, credit card, line of credit/overdraft protection for your checking. Or a student loan, car loan, and credit card. Etc. You do whatever makes sense for your point in life and stick with it.
Mix of Credit- Mix of credit makes up for 10% of your credit score. It is not so necessary to have a huge mix of different trade lines, but a variety of loans helps your overall credit score.
- My Recommendation: As I said above in length of credit history, open 3 trade lines but diversify what they are. It is not very beneficial for you to open all 3 credit cards at different retail stores. Sure you will establish some credit, but your score will go up higher quicker with diversity.
Inquiries– Inquiries make up for 10% of your credit score. Your credit score is pulled as a hard inquiry every time you request credit/ask for a loan. FICO score ignores similar credit pulls for mortgages, auto loans, and student loans within a 14 day span, just in case you are rate shopping. These will count as one inquiry instead of multiple.
- My Recommendation: While it is exciting that you are building your credit, don’t obsess with checking your credit score. Wait six months between inquiries. If you just cant resist checking your score, do a soft pull.
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Thanks for reading!