Many people have financial goals — perhaps getting an education, buying a car, buying a house, or starting a business — that require access to credit. However, if you’re new to credit, trying to build up a credit history can be daunting. It helps to know the basics of the FICO® score.
A FICO score summarizes your credit report into a three-digit number. Credit reports are kept by the three national credit bureaus – Experian, Equifax and TransUnion. The score includes measures of how long you’ve had credit, how much credit you have, how much of your available credit is used, and whether you paid on time. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow and how much it will cost you (eg the interest rate).
“Knowing that access to credit is a key component of economic inclusion and financial independence, FICO has spearheaded efforts to help more consumers access credit, safely and responsibly,” said Sally Taylor, vice president and general manager of FICO Scores. “Before FICO, human bias could play a role in the decision.”
But what if you’re a young adult or an immigrant with no credit score at all?
Lenders want to include new borrowers. To help support this, FICO and lenders are using alternative data and innovative credit scoring techniques, while increasing consumer credit education efforts.
FICO has introduced alternative scores such as the UltraFICO Score, which enhances credit bureau data with data not typically found in traditional credit bureau files, such as your checking account balance information authorized by the consumer. The recently introduced FICO Score 10T taps into trend data – a closer look at traditional credit bureau data, using trend data takes into account a historical view such as account balances for the previous 24 months and more, giving lenders more insight into how individuals manage their credit.
People can also take steps to actively build their credit history. To help you, here are five things to know if you are new to credit:
#1. Understand the basics of your score
Ninety percent of major US lenders use FICO scores to help them make lending decisions. To get a score, you need at least one credit account that’s been open for six months or more and at least one account that’s reported to the credit bureaus in the last six months (these criteria can be met with the same account).
If you have no credit history, you may consider applying for a credit loan or a secured credit card.
#2. Take advantage of new ways to build credit
More and more lenders are using newer scores that leverage alternative data sources, such as telecommunications, utilities, and current account data. To help build a credit history, consider opportunities with reputable lenders and credit bureaus to proactively share your personal and responsible financial information (such as on-time rent payments).
#3. Actively monitor your score
Research has shown that consumers who check their credit score frequently are more likely to have a higher overall score. There are several ways to monitor your score. FICO works with over 200 institutions to provide free FICO scores to consumers. You can view your monthly credit card statement, your online banking environment or go to: www.myFICO.com to monitor your score.
#4. Demonstrate responsible borrowing and stay the course
Your FICO score is dynamic; it changes with your credit behavior. Your score today doesn’t have to be your score tomorrow. Plan and stay the course with positive borrower behaviors that will reflect on your credit report. Stay up to date on your bills, keep balances low, and only request the credit you need.
#5. Empower yourself with knowledge
Understanding your credit score and how to manage it doesn’t have to be a mystery. There are many educational resources available, including free FICO-backed workshops where you can learn about your credit score directly from the experts. Visit: www.scoreabetterfuture.com to learn more.
Whether your goal is to buy your first home, go to college, or finance a new car, it’s worth considering a target credit score that gets you there. With this goal in mind, and these educational tips and resources, you can start charting a sustainable path to a FICO score that meets your financial goal, regardless of your current credit experience.