how to build and use a credit score: THE MOST SIMPLIFIED VERSION

Credit is one of the most intimidating topics and it’s a conversation that most people honestly avoid because it can be so confusing. Knowing if you have good or bad credit is even more scary because you’re either scared you won't be able to get it back up or scared that it’s going to go down. What is credit though? The term credit in this article is short for Credit Score. Credit Score is a grade that your bank will give you about how likely you are to pay back a loan (a borrowed amount of money used to make purchases that you may not be able to afford right now but will have money for eventually). If your score is 300-600 that is very bad. If your score is about 600-700 that is okay. If your score is 700-800 that's great! 

Whether you’re buying a house, car, or putting in a pool, your credit score will come into play unless of course you are paying cash, but who wants to drain their accounts like that? Not me! Your credit score also gives you more freedom in negotiations on said purchases. The more your finance adviser in a purchase negotiation can trust you (meaning the better your credit score is), the less they’ll try to get your amount paid off sooner by giving you higher notes. 

Here is how it works: You have Installment Credit and Revolving Credit. Installment Credit is determined by set payments such as your car note, house note, or payments on a boat. Your Revolving Credit is determined by your Credit Card use and payments. Different Bureaus will weight these differently when determining your credit score which is why you may pull your score and it says one number but a business will pull your score and give you a different number. Also note that pulling your credit score makes it drop so when preparing to make a big purchase, try to minimize the number of inquiries placed on your score by screenshotting or printing your score prior to meeting with your realtor or salesperson.  They will still have to pull an official report before your purchase, but this will at least reduce the amount of times you have to pull the information.

Here comes the hard part of credit: How do you get it and how do you make it “good”? If you have never had anything that entailed receiving a credit score such as a loan or a credit card with your name on it, here are some ways we can make it better! 

Let’s start with a quick warning, if you miss one single loan payment your score can drop by 50-120 points. It’s very important before you make any loans or take out any cards that you put in your calendar or set a reminder of when these payments are due. I even highly encourage paying them a 2-3 days in advance. Now let’s get to the building!

The first way I would suggest is by becoming an authorized user. This means that someone, preferably a trustworthy parent or guardian, will add you on their credit card account. The bank will provide you a card attached to their accounts that has your name on it and from there you can start to build your credit score through spending and paying off those amounts. 

The next way I would suggest is to just apply for a credit card. Don’t just start free spending though! Save this card for food or necessities so that you can try to keep the amounts spent and owed consistent. Then pay back the amounts due in bulk. You should make 2 payments in each statement period. You will want to make a payment 15 days before your amount is due and then again 3 days before it is due. Here is an example:

Say you owe Chase Bank $3,000 and your statement period starts on the first of the month. You would pay $1,500 on the 15th and $1,500 on the 28th or 27th based on if the month is 31 or 30 days. 

A side note on your credit cards though: say you get a credit card with a $10,000 plan, there are certain banks that will lower your score once you spend over 50% so be mindful when choosing your card or credit bureau!

Another super simple way I would suggest you start to build credit would be to go to your bank and apply for a small loan. A good ‘small’ amount would be $500, but don’t spend it once you receive it since you’re about to pay it back in full plus interest. Put this money aside and add in the expected amount you will pay in interest.

Once you have this amount put off to the side, use that to pay off this loan over the few months. While your credit score will initially drop, with every payment you score will go higher and higher!

Once you get your credit score up, you will be able to use that for better insurance rates, car notes, house notes, and more! Credit Score is so important to control. I suggest checking your score at a minimum every six months and if you’ve used all these tactics and still can’t figure out how to fix your score, contact a finance advisor. Getting your score right is just as important as saving money for your long term financial freedom and success. 

Feel free to reach out with any questions or comments!