Money Monday: Credit scores

When you are between the ages 18-to-25 it's not surprising if you have not put much thought into your credit score. Truthfully, neither had I until a few months ago.  Even if you don't want to think about your credit score, there are a few basic things you need to know. You can find all the information below and much more in the original article on the Living Young & Free field guide.

Wikipedia defines a credit score as “a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person, which is the likelihood that people will pay their bills.”  

In other words, your credit score tells a potential lender or landlord how likely you are to pay your loan or rent on time. It also helps a potential employer verify your identity and other personal information.

Why your credit score is important

Unlike golf, a low credit score is not great. A low credit score can stop you from getting a student loan or could jack up the interest on a loan.

The good news is, if your credit score is low, you can work on it and make it better. Like a do-over! Here are some steps you can take:

  1. Pay your bills on time—even if it’s just the minimum amount due.
  2. Hang on to old credit accounts (they don’t need to be active—they contribute to your history).
  3. Review your credit report and contact the appropriate credit bureau to fix any errors.
  4. Reduce your credit card balance as soon as you can to less than 75% of the limit. (25% is preferred.)
  5. Be careful who you authorize to review your credit report. Read applications carefully to understand what your signature is authorizing. (You can check your own report with no effect.)
  6. Don’t open any new credit accounts prior to a large purchase such as a mortgage.

Credit cards

Credit cards are basically the easiest way to get credit. They are accepted almost everywhere and because of this convenience, credit card companies can charge a lot in interest. You can get credit cards from your credit union (at a reasonable interest rate), from a bank (at a higher interest rate), and from most retail companies (at sometimes crazy interest rates).

Along with the interest, you may also be charged an annual fee. This fee may cover additional card benefits, such as insurance on your purchases or a rewards program. Read through credit card information carefully before deciding on which card best suits your needs.

Here are some additional tips on credit cards: 

  1. Try to never use your credit card for a “cash advance.” These transactions usually carry a separate and higher interest rate, and possibly additional fees.
  2. On average, credit unions tend to offer the best credit cards, with interest rates close to half what the big banks charge!
  3. Leave home without it! Keep your credit card at home in a safe place to avoid the temptation of making large purchases with money you don’t have.