Credit 
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How To Start A Credit History

When you’re young, have little or no income, and want to build a credit history, it’s really difficult. The current credit environment has made it much more difficult so here are a few methods I’ve used, or have seen recommended, in the past in order to build your credit history.

One tip that has been removed from lists like these is the Authorized User tip. In the past, a parent could add a child onto one of their accounts as an authorized user and the child would see credit history benefits. Many people took advantage of that by “renting” out these authorized user slots and so FICO responded by cutting that link. Now, it appears, that authorized users have no bearing. This is the case of people trying to subvert the system for profit and the system, rightfully, punishing everyone. You can read more about the whole authorized user practice here.

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 Credit, Retirement 
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Credit Score Demystified (sorta)

Ever wonder what dings up that you credit score? Credit bureaus don’t give out the equation they use to figure your FICO score but through varying sources such as mortgage agents, credit card schemers, and folks who just keep an eye out on their credit score and see how it reacts to their behavior; we’ve gleaned a few tidbits that will teach you how your score is derived.

First things first, after you request your credit score you’ll actually get three of them: a FICO II Score, a New EMPIRICA Score, and a BEACON Score. They correspond to the three credit bureaus and their scoring equations:

  • Empirica Score credit score = Transunion credit bureau score
  • Beacon Score credit score = Equifax credit bureau score
  • Fair Issac / FICO Score = Experian credit bureau score

Hard Inquiries Vs. Soft Inquiries: Whenever you request credit (apply for a new credit card, try to get a mortgage or car loan, etc.), the institution extending you credit will want to get your score and assess your history in terms of risk. High score means safe and safe means low interest rate. They will pull a ‘hard inquiry’ that is recorded on your history and is ‘negative.’ A lot of hard inquiries means either you’re cavalier towards applying for credit or you’re trying to get a lot of credit very quickly, both cases are bad. A soft inquiry is the result of an informal look at your history, typically when you view your own credit or if someone else takes a peek. These aren’t as bad because they don’t mean that you’re looking for credit, it just means you or someone else just wants to know about your history to perhaps send you an offer. You can opt out of soft inquiries by telling each of the big three bureaus.

Lines of Credit History: History is only good if it’s old, we’re talking minimum 3+ years. Knowing you’ve been current on loans for three years is more meaningful than knowing you’ve been current for three months. Usually credit card companies won’t even give notice of late payment unless you’re 60 to 90 days late, that’s because they know someones people miss payments by accident.

Percent Utilization: “Keep it under 25%” is the maxim you should follow but if you let it slide to 50%, it’s not as bad as hitting 70%. If you have $10,000 of credit, keep your percent used under $5,000 or it looks like you’re in trouble. This is why requesting increases in your line of credit is key because it will decrease your utilization without dinging your history with a hard inquiry.

Types of Credit: Most college graduates will have large college loans outstanding, which appear on the record, and institutions know it. If you have a high utilization but it is predominately college loans, they’re typically okay with it so it won’t negatively impact your score as badly as if it were credit card debt. Part of the reason is the relatively low interest rate when you consider some people are paying over 25% interest on credit card debt.

Bottom Line: When making a financial decision, don’t base it on how it will affect your score, make it based on how it will affect your wallet/pocketbook but keeping in mind that your score may be affected. It’s like doing something for the tax break, it’s not worth it. Pay off your credit card debt because of the astronomical interest rate and don’t make that extra mortgage payment in lieu of it. And always stay current.

Update: (2/24) Added the three types of scores and which bureau they correspond to.


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