Sponsored by Capital One
“You should get a credit card,” my Dad told me as I headed off for my freshman year of college. Many personal finance gurus and rookies alike may gasp in horror over my Dad’s suggestion, but his rationale was sound. A credit card, he explained, would help me develop credit history, which provided the foundation for my credit score.
Frankly, none of that really made any sense to my 18-year-old self who just wanted to enter the world of sheltered adulthood in college. I wasn’t entirely sure what a credit score was nor why it mattered, but I got my first credit card and followed my Dad’s recommendation to just make one small charge each month and pay it off in full. I would buy a tank of gas for my car and then pay the bill off without a second thought.
Four years later, I realized it was some of the best financial advice my Dad ever gave me as I scoured the streets of New York City looking for an apartment. Four years of diligently making a small purchase and paying off my credit card helped me earn a 720 credit score, which in turn made my life much easier.
But first, let’s talk about what exactly is a credit report and credit score.
Decoding your report card for adulthood
A credit report and the score it helps generate is more-or-less your report card for adulthood. The credit report keeps track of how you interact with credit, which includes primarily: credit cards, auto loans, student loans, mortgages and personal loans. Your credit report also tracks other important information, like if you don’t pay your cell phone bill and your carrier makes a collections agency keep calling you demanding payment.
This information is reported mainly to three major credit bureaus: Experian, TransUnion and Equifax. Your lenders aren’t always required to report to all three credit bureaus, so the same information may not appear on all of your credit reports.
The information on your credit report is used in turn to determine your credit score. There are hundreds of variations of credit scoring models, but you can more-or-less assume it’s on a scale from around 350 to 850. The higher your score, the more reliable you look to a potential lender. Your goal should be to have a credit score at least above 700.
Getting into the 700+ Club could help the rest of your life, financial and otherwise, fall into place more easily. A high score can offer financial benefits such as better pricing, lower interest rates, better rewards – and in general, is a number you want to have as high as possible. Plus – it’s never been easier to check your score with free tools like CreditWise® from Capital One.
Who cares about my credit score anyway?
It isn’t just potential lenders using your credit report and/or credit score to evaluate your reliability, but also other key people in your life like landlords and even employers.
My 720 credit score out of college simplified my first grownup apartment search by making me an appealing candidate to landlords. That number and my credit report represented four years of on-time payments, which indicated I’d probably pay my rent checks on-time. A low credit score could’ve trapped me into a less than favorable living situation.
Did you know employers may also pull your credit report during the hiring process? If not, you’re not the only one. According to the Capital One Platinum MasterCard Credit Confidence Survey, only 22% of millennials recognize that having poor credit could put the brakes on landing their ideal position. This is just another reason why college students or recent graduates should be proactive about establishing a credit history. It could help you in your first job hunt.
How can I build a healthy credit history?
Building and maintaining a healthy credit history and credit score is not only easier than you may think, but it can also be done at no extra cost to you.
One way to build your credit is to get a credit card with no annual fee and make a few regular charges a month. Then, once your bill comes in, pay it off on time and in full. You should try to never carry a balance on your credit card month-to-month. The practice will help you avoid paying interest.
A card like the Capital One Platinum MasterCard can help establish your credit history without the fees. Not only that, but you also get access to tools that help you improve your credit, such as helpful alerts for payment due dates and a free credit score monitoring tool called CreditWise – which is also available to everyone, even people who don’t have a Capital One product. One of my favorite features of CreditWise is the simulator – you can see how certain actions (like paying on time for two years or paying down your credit card debt) might impact your score.
You may hear that you need more than a credit card and that it’s a good idea to get an auto loan or a personal loan for the purpose of building credit. Honestly in my experience, this isn’t a necessity. I’ve gotten into the high 700s by just utilizing credit cards for nearly a decade. If you’re dealing with student loans, then always making on-time monthly payments will also help build and maintain a healthy credit history and score. Coupling your student loan repayment journey with proper credit card use can put and keep you in the 700+ Club in no time.
What if I don’t plan on borrowing money?
As a rare millennial that’s been able to avoid borrowing money thus far in life, I understand the urge to keep from borrowing money at all costs in the future. But that doesn’t mean I think it’s a good idea to be without a high credit score – especially when it can be simple (and free) to build. A healthy credit history is like having insurance on your financial life. I might not want to take out a loan, but it’s reassuring to know I have access to top-notch offers from reputable companies with low interest rates if I do have to take out a loan.
Building and protecting your credit history and score could give you access to the best financial products on the market. I’ve never paid a penny in interest on a credit card, so I consider this a free insurance policy on my financial life.
Disclosure: I was compensated for this post for Capital One, but opinions and advice are my own. However, there are no affiliate links in this blog post. I will not receive payment if you sign up for any products mentioned in this article.
Photo credit: Startup Stock Photos