Oportun: 5 Money Moves to Make at the Beginning of One’s Credit Journey

Beginning to build a credit history marks a significant financial milestone. The steps an individual takes early on can have a substantial impact down the road as they make progress. It’s essential for new borrowers or cardholders to understand what influences their credit scores so they can create positive habit early on. This article covers five money moves to make when starting on a credit journey, from improving credit mix with personal loans to making timely bill payments.

1. Improve Credit Mix with a Personal Loan

Credit mix, one of the five FICO credit score factors, measures how diverse an individual’s credit accounts are. For example, Person A has a credit card, a student loan, a mortgage, and a personal loan. Person B only has two credit cards. Person A has a better credit mix, which will help their score more.

A personal loan is a versatile tool that can help borrowers receive the funds they need and improve their credit mixes. These loans are often fixed-rate loans that borrowers repay on a schedule over time in installments of the same size. Borrowers can use their personal loans for several personal expenses, such as:

• Large purchases like furniture or appliances
• Home improvement projects
• Moving expenses
• Car repairs
• Medical needs
• Debt consolidation or refinancing
• Weddings, vacations, and other life milestones

2. Pay Every Bill on Time

Payment history is the most important factor in calculating FICO credit scores. It simply tracks how many on-time and late payments an individual has made. By paying every bill on time and in full, including credit card and loan payments, people can strengthen their credit scores dramatically over time. It also avoids late fees and other issues.

3. Create and Stick to a Budget

Budgets help people track and plan their spending compared to their income, and ultimately helps them spend less than they earn. This healthy habit is the best way to ensure bills are paid on time and in full.

A budget also helps minimize credit utilization, another credit score factor. Credit utilization measures the ratio of an individual’s total balances to total limits across all credit cards and on each card. Keeping this ratio low can increase one’s credit score.

In general, to create a budget, first add up total monthly income. Next, categorize monthly expenses, such as rent or mortgage payments, utilities, groceries, entertainment, subscriptions, and debt payments. Total each category and compare income to expenses.

Using a tool or system can help with budgeting. A hands-on approach is to do it all manually, with a hand-written ledger, or in a table or word processing tool on the computer. There are many smart phone apps that help with budgeting today, too, which can make budgeting simple. For example, some tools connect to a bank account and do all the income and expense categorizations automatically, and even offer personalized budget insights. There are also budgeting methods to consider employing, such as the 50/30/20 method or the zero-based budget.

4. Avoid Closing Old Accounts

Credit history length is another crucial credit score component. It measures the average age of an individual’s loans and credit cards, and also factors in the age of their oldest and newest credit accounts.

Those who keep old accounts open increase their credit history length and boost their score. Some credit card companies close accounts if the cardholder hasn’t used their card for a long time. Individuals aiming to maximize credit history length should use their older cards every once in a while to avoid these closures. Furthermore, keeping credit accounts open may help people maintain their credit mixes, if they’re a diverse set of credit-types.

5. Monitor Credit Regularly

Every year, individuals can get a copy of their official credit report from the three credit bureaus: Equifax, Experian, and TransUnion. Review the reports to understand yearly progress and look for potential errors. Dispute any errors in the report to get them removed and receive a credit score boost.

Besides that, consider signing up for an online credit monitoring service, which are often free. These FICO scores are not official but are often fairly close. Individuals can check on this unofficial score regularly to track their progress as their credit grows and catch any issues early on. Some banks and credit card companies also offer credit monitoring services to their customers.

The Bottom Line

The financial moves one makes at the beginning of their credit journey can pay off significantly and help them build credit faster. People should create and follow a budget while paying every bill on time. Meanwhile, they should try to keep their credit card accounts open, and monitor their credit score and report regularly. Additionally, borrowers who need to consolidate or refinance, make a large purchase, or cover an unexpected expense can consider a personal loan, and it’ll get them the funds they need and diversify their credit mix. Following these steps will help individuals get a head start on their journey toward a healthy credit history and strong score.