As they said in ancient Greece, know thyself—and thy spending habits. Okay, the Greeks probably didn’t say anything about spending habits. Just the same, getting real about who you are—in terms of how you spend money and use credit—is the first step to building, maintaining, and even repairing your credit.
How to Check Your Credit Score
Three agencies compile the credit-activity reports that FICO and VantageScore use to determine your score: Equifax, Experian, and TransUnion. Get to know them, personally. Jeff Richardson of VantageScore recommends checking each of their reports through an authorized website, such as annualcreditreport.com, once a year to monitor changes and take advantage of a law requiring them to show you your report for free annually. Your report may differ among the three agencies, and you might be surprised at what you find—such as someone else’s retail extravaganza! Report any inaccuracies you find quickly to the reporting agency to get them removed from your report.
You can also see the credit score FICO or VantageScore assigns you online (for free) because of new laws providing better access and transparency to consumers. Bank websites may also help you check your FICO credit score for free, but be careful of getting roped into buying or applying for something you don’t need.
What Credit Scores Mean
VantageScore and FICO credit scores range from 300 to 850, and a good credit score is anywhere above 700 according to Experian. The national average is 680 in the U.S., which is considered acceptable. Here’s what your credit score means:
800+ You will get plenty of credit at the best interest rates, which also means credit card companies will court you with offers like frequent flyer miles.
740-799 You’ll also get better rates than most and still might be eligible for some perks.
670-739 Labels you an acceptable borrower, but you may have some questions to answer, which can be stressful when you’re buying a house, for instance.
580-669 You will likely pay a higher interest rate than other borrowers, which can add up to 25 percent to the price of things you buy.
579 and lower It’s time for a credit makeover, and you likely should not be trying to take on any new credit at this time to avoid very high interest rates.
How to Start Building Credit
When establishing credit for the first time, it’s especially important to know yourself—and who you think you’ll be once you get your hands on a credit card. Before applying for a card, ask yourself some questions, recommends Paul Golden, of the National Endowment for Financial Education.
How are you going to use the card? Will you pay it off each month? Do you have problems with overspending? Will you consider your new card a chance to earn a solid credit score or an embossed invitation to go on a glamorous shopping safari, dahling?
To get your first plastic, ask your bank or credit union for a card with a low spending limit, suggests Steve Brobeck, senior fellow at the Consumer Federation of America. If you’re positive you’ll pay it off each month, the interest rate isn’t too important. If your bank balks at giving you a card at all, talk to them about building up a savings account that can be held as a guarantee that you’ll pay off the card.
A first credit card is a chance to prove you can get into—and out of—debt. Keep the balance under $100, and pay it off on time every month. Many credit experts recommend setting up a monthly bill, like for your cell phone, to pay through your credit card. Definitely not very glamorous, but it will point you toward a credit score that can translate into good interest rates on the big things like a mortgage.
How to Maintain Your Credit
You know you have to make loan or credit card payments on time to keep a high credit score, but did you know that you’ll lose points if you use more than about 25 percent of your credit limit? FICO’s latest version, FICO Score 10, will assess your credit over the past two years or more. The changes to the formula “intend to more adequately measure the risk of default. It is now even more important for consumers to keep credit card and personal loan debts low,” says Brobeck. Starting this summer, you may see two scores on your FICO credit report: one based off the new formula and the other from a past version. Similarly, VantageScore also includes two years or more of your credit history in its formula.
Smart Tip: If you do max out your credit, but you pay everything off in full as soon as a payment is due, wait a month or two for your credit score to rebound before applying for any other loans, says Danielle Place of VantageScore, one of the two credit-scoring agencies.
What about applying for credit frequently? Having your credit score pulled one or two times a year as part of a credit application, like when you’re renting an apartment or buying a house, won’t hurt you. More frequent inquiries can make it seem like you’re out there shopping frantically for additional credit, which is not reassuring to the credit gods.
Know What Lowers Credit Scores and Stay Within Your True Limit
While you may have thousands of dollars available to you in credit, you should never spend more than you can pay back in a reasonable amount of time. People don’t often brag about their credit scores the way they might about their golf score or their kid’s domination of the SAT. More often, says Brobeck, people advertise their financial status, not by flaunting their ability to pay their debts, but by buying stuff.
The problem with that, of course, is if you’re already stretched tight and a big unforeseen expense comes along (each year, you have about a 65 percent chance of having such an expense, according to Golden), you may find your debt beyond what you can afford to pay.
Consumers who always make payments on time will benefit from FICO’s new scoring system. “Those missing or making late payments will not,” Brobeck says. People who refinance rising credit card debt will also be more likely to set off alarms and see a drop in their scores.
Missing a car loan payment can lower your credit score by up to 90 points. Missing a mortgage payment can cost you 100 points. And with a damaged credit score, any future borrowing can cost you a lot more in interest. For instance, with a score under 670, you can end up paying $5,000 more on a $20,000 car loan.
How to Rebuild Credit
So, what are your options if your score is low?
First, triage your credit cards. If you have more than one, pay off any with an interest rate of 25 percent or higher. Then pay off the smaller debts and work up to the largest one. At the same time, make sure you pay at least the minimum payment—on time—on all open accounts.
Consider balance transfer offers with a lower interest rate, but beware of introductory rates that skyrocket if you don’t pay off your balance within a certain timeframe. And try to avoid taking on additional credit, because if your credit score is low, the interest rate will be high, which will only prolong your agony.
Smart Tip: If you have trouble managing your debt, consult the National Foundation for Credit Counseling to find non-profit credit counseling agencies in your area.
And once again, know your spending habits. Track your monthly spending so you can figure out how to save money in order to apply it to your debt as quickly as possible.
“Look back at your expenses and see what happened,” says Golden. “Part of the irony of this whole process is it’s easy to get into trouble—and hard to get out.”
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This article was first published in October 2018 and last updated in March 2020.