You’re Not the Only One Who Doesn’t Understand Credit — Here’s How to Build a Better Score

College and general adulthood are times to experience firsts, like buying your own car or renting an apartment. Before you can do either of those things, though, you have to have a good credit score. 

But what is credit, anyway? And how can you build it when you don’t have much money to begin with? Here’s how to improve your credit score to be a better adult and create a positive financial future — because a head start never hurts anyone.

  1. 1. Understand what credit is

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    What is credit, exactly? Consider it like this: When you need to borrow money from a friend, they’re more likely to give you cash if they know you’re reliable. They need to see if you’ve paid other people back before and if you’re hardworking enough to earn the money you owe them.

    Credit is how financial institutions do the same thing. They look at your financial history to see if you’ve paid bills on time or repaid loans. Your credit report also includes additional personal information to prove your reliability, like:

    - How many credit cards you have

    - What your outstanding balances are

    - How many financial setbacks you’ve experienced

    Your credit score combines all these factors so that creditors can learn about you at a glance and make quick decisions about your financial situation. That’s why understanding credit is so vital.

  2. 2. Review your credit reports

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    So what’s a credit report? It’s a report of all your previous credit — in other words, your credit history — and it shows your credit score, which is the number potential lenders use to determine how reliable you are. You can easily check your credit by signing up for a free account on CreditKarma.

    Many college students don’t start with a credit history. You may not have paid rent before or even opened a credit card. You probably have student loans — which absolutely factors into your credit score — but since you’re not currently paying them off, it won’t do much for your score yet. 

    Even after getting your first credit card, you’ll start with a low score and need to earn points by paying off the balance or required payment monthly. History counts more toward your number than your current payments. If you need to sign for a significant purchase soon — like a new phone or laptop — look into opening a credit line for that instead of turning to your parents or digging into savings. You’ll pay off your purchase in small monthly payments, and you’ll work towards building your credit score in the meantime.

    Wondering how your credit score is actually calculated? The number is determined by factoring in percentages of five categories of credit data, including your payment history, credit mix, length of credit history, new credit and amounts owed. If you have zero clue what a good credit score even is, here’s a cheat sheet: Scores typically go from 300 to 850, which is the best of the best. If your credit score is below 629, it needs work. Aim for between 630 and 720 for decent to good credit, and if you reach above 720, even better! The higher your credit score, the better the rates (read: the lower the payments) you’ll qualify for, and the less interest you’ll pay over time on credit purchases. 

  3. 3. Consider financing your payments

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    If you have existing credit card debt and can’t pay your bills on time because of a tight budget, financing will improve your situation. What is financing? It reworks your debt and consolidates it into one place so you can make smaller regular payments and get credit for your timeliness. 

    For example, if you’re struggling with paying off student loan debt and credit card bills, you can take out a personal loan or financing plan that combines all that debt into one place and one monthly payment. Essentially, the new loan provider pays off all your previous debt, and you will instead owe the entirety of that debt to your new provider. The financing provider will work with you to offer a more manageable monthly payment instead of keeping track of various payment types and sums. 

    Typically, your bank will offer different types of personal loans and financing plans you might be pre-approved for as a member, or you can shop around various credit providers to find the plan that works best with your budget. Keep an eye on interest rates to make sure you won’t end up paying much more in the long run. It will take longer to pay off what you owe, but you’ll never tank your score because of a missed bill.

  4. 4. Avoid running hard inquiries

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    You might know that you need to apply for a credit line or credit card, but do you understand the two types of credit inquiries — and how they affect your score?  

    Hard inquiries or “hard pulls” are credit checks that lenders perform to make a big lending decision. Creditors run hard inquiries when you apply for a new credit card, major loan, or mortgage. These checks stick to your financial history for a certain period of time and can serve as a red flag for other lenders. 

    Of course, sometimes hard inquiries are necessary — but too many in a short period of time can make your credit score drop significantly and can look fishy to future creditors. If they see multiple hard inquiries in less than a year, they know you’re likely in financial trouble and a less reliable customer. If a hard inquiry is essential — which, for utilities or a rental lease, it will be — don’t worry. These types of inquiries will typically drop off your credit report after two years. Just don’t overdo it.

    Soft inquiries, on the other hand, have less of an impact on your credit history and are not connected specifically to applying for a new credit line. For example, lenders may also run soft inquiries if you’re getting an estimate for a new car or potential loan, or they could be part of a background check or qualification process. Those don’t affect your credit score, so they’re a better option. 

    Some inquiries, like those necessary for setting up utilities or internet, could be classified as either hard or soft inquiries. Unfortunately, you typically cannot choose whether a creditor will run a soft or hard credit inquiry, but you can be aware of the difference and ask the company before they make the check.

  5. 5. Limit your credit cards

    This might seem confusing at first — after all, you need to open credit cards to start building a credit score, right? Yes, but that doesn’t mean you should go overboard. 

    Opening too many credit cards is another way to hurt your financial history. Lenders will see you applying for more spending credit and assume it’s because you lack the finances to pay for things with a debit card. It also makes it easier to accrue debt through multiple interest rates, so avoid opening more than one or two credit cards to keep your debt to a minimum.

  6. 6. Use less total credit

    Your credit utilization ratio (read: the amount of available credit you have on your credit line vs. what you actually spend) plays a significant role in your ability to sign for loans or leases. This is your total credit measured against how much you’ve borrowed. Financial advisors recommend that you use only 30 percent of available credit so it’s easier to manage. It also shows lenders you can balance your finances and pay everything on time.

Learn how to boost your credit score

You can boost your credit score to be a better adult with a bit of research. To build your score, avoid accruing too much debt, making hard inquiries and missing payments. Financing payments and limiting your credit cards can also make a significant improvement if you need help creating and maintaining your financial history during or after college. 

It might seem complicated, but building good credit is really just a balance act between spending responsibly and making payments on time. Stay on top of your bills, and one day you’ll qualify for a really great rate on that dream car or apartment — not a bad reward, right?