Many years ago, my young bride and I went to rent an apartment. The landlord told us, “You look like a nice young couple,” and that was all we needed to be in order to sign a lease and move in. Today, renting an apartment is a little more complicated, and a credit score check is often part of the process. Landlords know that a renter with a good credit score is more likely to pay their rent on time, than one with a lower score
When my son was young, I knew some day he’d be going to college and moving out and starting his own life. So, as dutiful parents, we began planning for his future. We did obvious things, like start a college savings account for him. But we did something else, too. We helped him establish a credit history, and taught him how to build a good credit score.
If you’re over thirty, or even over 25, you probably have a credit score, whether or realize it or not. But what about young people just starting out in life. Not too many teen agers are making monthly payments on credit cards or utilities. But they can, and should be doing this in order to help establish a credit rating for themselves.
For example, when my son was a teenager, we put his cell phone in his name. I paid the monthly bill, but cell phone companies report to the major credit bureaus, and that’s how a credit history is created. Another thing a parent can do is to help a teen procure a credit card, say with a limit of $500. In order for this to be actually in the teen’s name, you may have to secure the card by putting $500 in a savings account with the issuing bank. Have the teen use the card for small personal purchases, and make sure at least the minimum payment is made every month.
When my son went to college and lived in an apartment community, again, we put the lease in his name, even though we paid his rent. I co-signed on one vehicle he financed. After that, he was able to buy a car entirely with his own credit history.
So, the first goal is to establish credit. You do this step by step. If you can get a bank credit card, even with a small credit limit, and you use it and pay it off on time, the bank will start to raise your credit limit, and this is good for your credit score.
The exact method the big three credit reporting companies actually figure your credit score is not shared with the public, but some things are known. The biggest one is just paying your bills on time. But that’s not enough. Having credit cards helps, but running your balance up to your credit limit seems to hurt your credit score. Opening too many credit accounts also seems to hurt your score. Even closing out a credit card can lower your score because it reduces the amount of potential credit you have.
While there is no quick fix to raising your credit score, doing these three things will help you over the long haul:
- Pay your bills on time
- Don’t keep your credit card balances too close to your credit limits
- Don’t apply for a lot of credit. Every time you do, your credit score will drop a little.