Establishing good credit is so important it should be taught as a required course in high school. In the not so distant past, a credit rating was used only when you applied for a loan. Today, establishing good credit and a good credit rating is essential as many employers use credit scores to evaluate applicants. When you apply for a cell phone account, want to rent an apartment, set up cable service or get car insurance, your credit score is a factor in determining if you are a good credit risk or not. If you are applying for a loan of any type, the lower your credit score is the higher your interest rate will be.
Approximately 35% of your credit score is determined by your payment history. Payments that are late is a sure way to send your score downward. Another 30% of your credit score is based on the amount of available credit you have and how much you use. For example, having a $5,000 credit limit and a balance due of $4,500 will result in a lower score. The remaining factors that are used to determine your credit score are the length of your credit history, the number of recent credit inquiries and the type of credit you have (revolving account, installment credit and mortgage credit). It is harder for younger people as they don’t have a lengthy history which makes it even more important to start with an excellent payment history.
In order to establish a credit rating, you first have to open some type of credit account that is reported to the credit bureaus such as a prepaid credit card or a store credit card. This are the easiest types of credit to obtain when you do not have a credit rating. Once you obtain a credit account, it is important to make a small purchase each month and to pay the full balance due. The credit company will report this activity monthly to the credit bureaus. The credit bureaus evaluate how you manage credit by your payment history and how much of your available credit you use.
Starting early will help you establish a good foundation in building your credit history. Although most utility (cable, internet and cell service providers) do not report payment history to the credit providers, they will report if your account is turned over to a collection agency for non-payment. Start early, use your available credit sparingly and always pay all of your accounts on time.