Meet Jasmine. Jasmine is a college student attending State
University. Like many college students, Jasmine has seen
a lot of her friends and family use credit, whether it's through a mortgage, a private
student loan, or simply a credit card. However, Jasmine has always been too afraid
to use credit herself, leaving left her with no credit history and a non-existent credit
score. What should Jasmine do? Well, beyond watching our two other introductory
videos centered around credit, “Credit Cards 101” and “Loans 101”, her next step
is simple: understand her credit report and score. A credit report is straightforward. It’s essentially a detailed history of your
credit, covering everything from your payment history to the age and status of your accounts,
as recorded by the three major credit bureaus in the United States: Transunion, Experian,
and Equifax. As you imagine, this is quite a lot of information
for anyone to process, so one company actually created a simple way to summarize this information
called a FICO credit score. This is a calculated number between 300 and
850 that summarizes your credit report.
The higher your score, the lower the interest
rates and the better the rewards you’ll get from banks, plus a high credit score is
also vital for a number of other things, like getting affordable insurance, finding an apartment,
or even qualifying for a cell phone plan. Ironically, for such an important number,
getting your credit score actually used to be quite difficult, and expensive, but now
we recommend several websites that make it free and easy for you to get your credit score
and report online.
This is great for Jasmine, but she’s still
confused about one last thing. What exactly makes up a credit score? Well, a credit score is actually made up of
five parts, and from understanding each one, you can derive the four major ways to improve
your credit score. Part 1: Payment history, 35% of your score. Because this is such a large number, it reveals
the importance of paying every bill on time, even if it’s just the minimum. If you’re struggling with this, we highly
recommend setting up automatic payments for everything, especially your credit card. Part 2: Credit Utilization, 30% of your score. To avoid damaging this, we recommend not exceeding
more than 30% of your maximum credit line both total, and for each individual account. If you’re struggling with this, try paying
off your balance early a few times a month, or asking your bank for a credit line increase. Part 3: Length of Credit History, 15% of your
score.
The existence of this component means, rather
counterintuitively, that you shouldn’t close out your old credit accounts unless you absolutely
have to, as otherwise you’ll hurt your credit score. Part 4: Recent Inquiries for Credit, 10% of
your score. This one’s simple. Don’t apply for new credit cards and loans
unless necessary, as each credit inquiry will slightly lower your credit score by a few
points the next twelve months. Finally, Part 5: Types of Credit Used, 10%
of your score.
Unfortunately, we don’t have a rule for
this one, as we just don’t recommend applying for multiple types of credit just to boost
your score. Finally, before we conclude, we just have
two things for Jasmine to keep in mind. One: To build a credit history, and thus a
credit score, you’ll need to use credit, and easiest way to this is open a credit card,
like a student or secured credit card, that is designed specifically for people with no
credit history.
And don’t worry, we teach you everything
you need to know in our two videos “Credit Cards 101” and “How to Rebuild Your Credit”. Two and Finally: Be sure to check your actual
credit report for mistakes at least once a year, as these errors can dramatically affect
your credit score. Should you find one, be sure to contact the
credit bureau as soon as possible. Hopefully you and Jasmine now better understand
how credit scores and reports work. Be sure to check our next two videos, which
cover common mistakes and best practices for credit cards and loans, and be sure to check
out our website, where you can find more educational content, your free credit score, and great
credit card recommendations..