Shortly after we were married, my wife and I were looking for an apartment. The leasing agent told us, “You look like a nice young couple,” and that was that. That’s not the way it works today. Background and credit checks are often part of the application process. Landlords know that a renter with a good credit score is more likely to pay their rent on time, than one with a lower score.
When my wife and I were just starting out, they didn’t have credit scores. If they had, we would have been totally unprepared. So, when we became parents, we began planning for our son’s future. We did obvious things, like start a college savings account. And we did something else, too. We helped him establish a credit history, and showed him how to build a good credit score.
At some point in life, like it or not, you will have a credit score issued by one of the three big credit reporting companies. The same isn’t true for young people just starting out in life. Teenagers usually aren’t making monthly payments on credit cards or utilities. But they can, and should be doing this in order to help establish a credit rating for themselves.
For example, put your teenagers cell phone in their name. You can pay the monthly bill, but cell phone companies report to the major credit bureaus, this can begin building a credit history for your child. Another thing a parent can do is to help a teen procure a credit card, say with a limit of $500. In order for this to be actually in the teen’s name, you may have to secure the card by putting $500 in a savings account with the issuing bank. Have the teen use the card for small personal purchases, and make sure at least the minimum payment is made every month.
When my son went off to college and lived in an apartment community, again, we put the lease in his name, even though we paid his rent. Putting the gas and electric utilities in his name also helps. Later, when he bought his first car, I co-signed the note. Those payments were then reported on his credit and on mine. After that, he was able to buy a car entirely with his own credit history.
So, the first goal is to establish credit. You do this step by step. If you can get a bank credit card, even with a small credit limit, and you use it and pay it off on time, the bank will start to raise your credit limit, and this is good for your credit score.
The methods the big three credit reporting companies use to figure your credit score is kept private, but some things are known. The biggest one is just paying your bills on time. But that’s not enough. Having credit cards helps, but running your balance up to your credit limit seems to hurt your credit score. Opening, or even trying to open too many credit accounts also seems to hurt your score. Even closing out a credit card can lower your score because it reduces the amount of potential credit you have.
Sorry, there’s no quick fix to raising your credit score. Just working on these three things and you’ll get there:
- Pay your bills and your rent on time
- Don’t keep your credit card balances too close to their limits
- Don’t apply for a lot of credit. Every time you do, your credit score drops a little.