Your credit can have a major impact on your life goals. Milestones like buying a car, owning a home, and paying off debts can depend on your creditworthiness. While it’s never too late build credit, it’s ideal if you can begin when you’re still young. Let’s look at how credit scores and reports work, how they can affect your borrowing ability, and some tips for establishing and boosting your credit.
Credit Reports Versus Credit Scores
These similar terms are often confused with each other.
A credit score is a single number between 300 and 850 that serves as a snapshot of your financial standing and your risk to potential lenders. The two primary score models are VantageScore and FICO. Both models take into account your track record of on-time or late payments, how much of your available credit you’re using, and the length of your credit history.
A credit report is a more detailed record of your financial accounts, payment history, balances, and previous credit inquiries from lenders. If you’ve ever filed for bankruptcy, gone into foreclosure, or had a lien placed on your property, these negative events will be included in your report. One thing that your report doesn’t include is your credit score. The three primary credit reporting agencies are Experian, Equifax, and TransUnion.
Some lenders, like credit card companies, will use only your credit score. Mortgage and car loan originators will likely use both your score and your report. Certain employers, landlords, and insurance companies may look at your credit report but may be legally prohibited from accessing your credit score.
Credit-Building Tips
Here are some ways you can establish a solid credit history and enhance your scores and report:
- Pay your bills on time. This is the number-one way to avoid negative marks on your credit history. Above all, lenders want to see that you can reliably pay back borrowed money.
- Don’t use all the credit you have. Lenders like to see utilization ratios under 30%. So, if you have a credit card with a limit of $5,000, try not to exceed $1,500 in purchases in any month.
- Reduce unsecured debt. Prioritize paying off credit cards, personal loans, and student loans. This will also improve your utilization ratio and save you on mounting interest payments.
- Consider a starter credit card. Secured with a fully refundable deposit, these cards can be a smart way for college students and young professionals to start building credit from scratch.
- Look into a credit builder loan. These work like loans in reverse: make monthly payments – reportable to credit agencies – and then collect the accumulated cash at the end of the term.
- Discover other credit building tools. Paying your bills on time is key – but you don’t get credit for every bill. Search for services that can add qualifying on-time payments to your credit report.
- Monitor your report. Federal law entitles you to a free copy of your credit report every year. Make sure everything on the report is accurate, and contact the reporting agency to dispute any mistakes.
- Don’t be afraid to ask for help. At Citizens Bank, we’ve been helping East Tennesseans to optimize their financial wellness and achieve their goals for over 85 years. Get in touch anytime!
