Chapter 1
Establishing Credit—How to Get Started
Before you can manage your credit, you need to establish a credit history. The catch-22 of credit is that in order to borrow money, you need a credit history, but you can’t establish a credit history without borrowing money. There are some easy ways to get started establishing and building your credit, but first let’s review what we mean by credit and how your credit score is used to measure your creditworthiness.
Credit is defined as the trust that a lender or financial institution is willing to extend to you based on past performance or your credit history. Lenders determine if they should give you a loan or a credit card or should lend you money based on your creditworthiness. They determine your creditworthiness by reviewing your credit score, which is a reflection of various factors, such as how you have managed your bills and payments in the past and your ability to repay whatever money you borrow.
Your credit score is a number between 300 and 850 and is the foundation of your credit. Scores in the range of 670-739 are considered good credit; if you have a credit score of 580-669, you may have trouble borrowing at favorable interest rates. Your credit score is monitored by three credit bureaus—Equifax, Experian, and TransUnion—and is based on your FICO score.
FICO credit scores were created by Fair Isaac Corporation in the 1950s. Your FICO score uses predictive analytics based on information gathered about your financial life, including your payment history, what you currently owe, the length of your credit history, the mix of credit you currently have, and new credit accounts. The three credit bureaus use your FICO score as the basis for their individual credit score ratings; however, the score for each credit bureau will differ based on the other information they have available.
Your credit score follows you throughout your life, and it changes depending on your financial habits. For example, if you are consistently late in paying your bills, it will reflect badly on your credit score. Similarly, if you have too many credit cards or take out too much credit at one time, it can have an adverse effect on your credit score. However, if you manage your credit wisely, you can maintain a better credit score, which makes it easier to borrow money.
Note that your credit score is used for things other than borrowing money. Landlords will review your credit score before they let you sign a lease on an apartment or rental home. Car dealers won’t let you sign an auto lease or receive an auto loan if you have poor credit. Even employers use your credit score as a way to assess whether you will be a responsible worker.
If you are just starting to build your credit history, it pays to start off on the right foot and establish a good credit score. If you have established credit, there are strategies you can use to improve your credit. One way to start is with the FICO Score Estimator. FICO scores are available inside our Digital Branch (online banking) for iQ members too, which is updated monthly. iQ Credit Union also includes instruction on credit as part of our financial education program.
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