March 18, 2018 | ° F

Ask the Experts:

Creating credit

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To the experts: I consider myself pretty well educated (or at least getting there, thanks to my professors), but I’ve been concerned for a while about how little I know about personal finance. High school and college (so far) have taught me all sorts of interesting things, but I’m short on practical knowledge about things like taxes and budgeting. One thing that really bothers me is how little I understand credit. I may not have to worry about saving for retirement just yet, but I am definitely doing things--like paying rent and using a credit card--that are affecting my credit score...right? How does this work? I don’t want to arrive in the post-graduation world with a ruined credit score just because I didn’t understand how it worked in college! 

From the experts: Let’s start by establishing what credit is and why you have a credit score. Credit is your ability to buy something without putting money up right away. Your Visa or Mastercard is called a “credit card” because it lets you do exactly that: you buy an item, you use the card, and the credit card company pays for the purchase with the confidence that you’ll be paying for it later on. 

Of course, credit card companies do not pay for unlimited goods for everyone. They would go out of business pretty fast if they did, because not everyone would pay them back! As it is, credit card companies are not going to get back all of the  more than $1 trillion in American credit card debt  that’s out there today. They make up for their losses by charging interest on your credit card balance or fees for the card itself, and most importantly, for our purposes they limit their risk by being careful about how much credit they extend to each customer.  Veteran auto retailers   tell us that car loan companies make the same sorts of decisions, as do mortgage lenders and other financial institutions. 

When it comes to assessing these risks, companies turn to the major credit agencies: Experian, TransUnion and Equifax. These agencies are dedicated to tracking your credit history and collecting reports from the people you have and have not paid back. They put together your credit score, which is a number measured on one of several different scales (FICO, a major one, runs from 300 to 850 — Experian, meanwhile, uses 330 to 830,  with the average American score clocking in at 687  ) — which means we’ve finally arrived at your original question. 

Credit scores are complicated, but you should know that they measure a few basic things. Your payment history is the biggest factor (35%) in your FICO score,  so make sure that you’re paying your credit card bills on time. Your outstanding debt matters, too, but it’s important to note that the credit agencies look at different types of debt in different ways — owing money on a student loan is not the same as running from six overcharged credit cards. Other factors include the length of your credit history, what types of credit you’ve used, and how often you do something (like take out a loan) that triggers a credit check. 

In general, you can count on having decent credit if you pay off your credit card bills, make loan payments on time, pay your rent, and do other obvious things. It’s also a good idea to get your credit report (it is free) from time to time--once a year will work--just to make sure that nothing fishy is going on (if someone steals your identity and takes out a bunch of loans, you want to know!). 

If for any reason you don’t have good credit,  credit experts  have said there are ways to improve it. The longer you wait, though, the tougher it gets. For the 24% of Americans who are worried about making their minimum credit card payments  , for instance, time is of the essence. Debt has a nasty habit of growing, so be careful about taking it on, and keep track of your debts and your credit score. 

“If you don't take good care of your credit, then your credit won't take good care of you.” ― Tyler Gregory.