Why Does My Credit Score Matter?
Your credit score is looked at by lenders primarily to determine your interest rate. Keep in mind, though, that for the most part you only need a credit score if you are planning on acquiring debt, such as a loan or car payment. I am not an advocate for acquiring debt. In my opinion, with the exception of maybe a mortgage, you should only buy things that you can pay for in cash. If you need to finance it, you can’t afford it. Anyways, if you still choose to acquire debt in any form, it would be a good idea to keep your credit score high so that your interest rates stay low.
What is a Good Credit Score?
The most commonly looked at credit score is your FICO score. Your FICO score can range anywhere from 300 to 850, with 300 being the worst and 850 the best. Your score will fall into one of the below categories:
- Bad: 300-550
- Poor: 550-649
- Fair: 650-699
- Good: 700-749
- Excellent: 750-850
Lenders look at the above categories rather than your individual score when determining your interest rate. By this I mean your interest rate will not change if your score is 751 or 820 because both are in the “Excellent” category. The lender will treat them the same. However, if your score is 748 as opposed to 752, you will likely be given a higher interest rate by the lender because 748 is “Good” and 752 is “excellent.”
How Do I Build My Credit?
In order to build your credit, you must acquire some sort of debt. These types of debt include student loans, car loans, mortgages, and credit cards. As I said before, I will not encourage you to ever acquire debt. However, I will encourage you to apply for a credit card. By doing this, you will be able to build a credit score without technically going into debt. You will not be technically going into debt because you will not be using this credit card. Just having one is sufficient for building a credit score. The only time that I consider it acceptable to use a credit card is when you have the discipline to pay the card’s balance down to zero each month. If you do this, you can take advantage of the card’s rewards without having to pay interest.
If you are between the ages of 18 and 21, your best bet will be applying for a “secured” credit card. This means that you will give your lender a sum of money, $500 for instance, and this will act similar to a security deposit. This $500 will also act as your line of credit, meaning that $500 is the maximum amount that you can charge on your card. Once the lender determines that you are eligible, they will convert your secured credit card into an unsecured credit card. An unsecured card is your typical credit card. These do not require the security deposit They will also return your $500 when this happens. Once you are 21, you can apply for a normal credit card.
Anyways, as I mentioned before, once you have a credit card, you DO NOT need to use it to build your credit. You could literally cut it in half and throw it away if you wanted to. I personally wouldn’t advise you to use it either unless you have the discipline to pay the balance down to zero each month. There are various factors that contribute to the calculation of your score that I will cover in a different post. However, actually using your line of credit is not one of these factors.
Remember, in most cases, a credit score is only necessary if you are planning on acquiring debt at some point. There are a few other things that a credit score may help with such as getting into an apartment or getting lower insurance rates. However, you can give the illusion of having debt by applying for a credit card to build your score. Remember, though, you do not need to use this card, you just need to own it. This is the first post of my new Credit series. Stay tuned for next week’s post about what factors positively and negatively influence your credit score!