Article | 2:30 min read

How You Can Start Building Your Credit Score: Part II

Credit and Debt

A couple discussing their credit score

Once you have a credit card to your name, you'll have to focus on managing your account and making payments on time. But this mindset also applies to other bills and utilities you might have under your name.

Pay bills

It's almost become a rite of passage for newly minted college grads to leave school with student debt to their name. According to research from the Federal Reserve Bank of Cleveland, most borrowers between the ages of 20 and 30 pay $203 a month for their student loans [1]. Not only are they reducing the amount owed, but they're also improving their credit score.

In fact, U.S. News & World Report stated student loan debt, and the associated monthly payments, can be a big asset as you look to build and maintain your credit score [2]. For every payment you make until the debt is paid off, you'll be doing more to show lenders you're responsible.

Student loan payments are classified by the three major credit agencies – Experian, TransUnion and Equifax – as installment plans. Luckily, organizations that handle student loans from the federal government have a few options available for you to afford the monthly payments. Don't hesitate to explore income-driven repayment plans or see if you can defer payments until you have a stable monthly income.

It's worth it to inquire about such plans because missed student loan payments will hurt you in the long run, as you might not be eligible for income-driven repayment plans, not to mention the negative effects on your credit score. Setting up automatic bill pay, no matter the type of payment plan you're on, can protect you against missed payments or other errors.

The little things matter

Once you've obtained your first credit card, you should consider setting up alerts and notifications with regards to your credit usage. You want to avoid falling into a trap of charging everything on credit and not paying off your balance in full every month.

An important number to keep track of is your credit utilization, which is the percentage of credit you're using compared to the total amount of credit available. Ideally, you should have a credit utilization ratio that is no higher than 30 percent.

Amounts owed makes up 30 percent of your credit score, according to FICO [3]. The organization stated that if you are close to maxing out your credit card, it may indicate you're overextended and more likely to miss payments.

A good plan of action is to use your card sparingly and always remember to pay off your balance in full every month.

Building your credit is a process that won't occur overnight. But by making sound financial decisions and watching your spending habits, you can ensure you put yourself on the right path to a favorable credit score.


[1]. Is There a Student Loan Crisis? Not in Payments

[2]. How Student Loans Affect Your Credit Score

[3]. Amount owed on accounts determines 30% of a FICO Score

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