Q&A: How to achieve a good credit score as a first-time cardholder

Late payments, high balances and hard inquiries are especially unforgiving with 'thin' credit profiles

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question

Dear Speaking of Credit
This is my first time owning a credit card and I want to know if it is possible for me to finance a car after six months of having the card, while keeping a good credit score. – Joseph

Answer

Dear Joseph,
Congratulations on your first credit card! Cards can be both a blessing and a curse. On the plus side, they can help your score tremendously with consistently on-time payments and low credit utilization – the amount you have borrowed compared to your credit limit. And yet just a single missed payment or maxed-out balance can send that score plunging.

The future of your credit scores will depend on how well you manage your new card account in these early stages of your credit history.

Consumers with “thin” credit bureau files tend to be more heavily scrutinized by the scoring formula than those with multiple accounts and a longer track record. Specifically, late payments, high card balances, and hard inquires can do more damage to your score in the early stages of your credit history than in the future.

To achieve a good score during this phase of your credit life, your credit report should continually show:

  • A perfect payment history: Not even one reported 30-day late is allowed.
  • Low credit utilization: Under 25 percent is good, under 10 percent is better.
  • Few hard inquiries: Don’t apply for or accept any offer for another credit card until your card is at least a year old.

How credit scores are created
Now let’s look at when you should expect to see a credit score, beginning with an understanding of the different minimum credit reporting criteria required by the two major credit scoring systems:

  • FICO (Fair Isaac Corp.), the originator of credit scoring that has essentially dominated the credit scoring world for decades.
  • VantageScore, a competitor to FICO, started by the big three credit bureaus about 10 years ago, whose scores have been increasingly adopted by lenders.

 

Video: How payment history affects your credit score

While there are many similarities between the two – the same score range of 300 to 850, for instance – their basic requirements for calculating a score are quite different, both in terms of account age and when the account was last updated at the credit bureau.

VantageScore
By far the easier of the two to qualify for, your VantageScore can be calculated with just one account reported to the credit bureau within the past two years. This means you should already have a VantageScore if your new card account has been reported to the credit bureau.

FICO Score
FICO’s requirements are stiffer, though still relatively easy to meet with a credit report showing:

  • At least one trade line opened more than six months ago, and
  • At least one trade line reported to the bureau within the past six months.

These two criteria can be met by one or two different accounts if neither qualifies on its own. For example, if your credit report shows an old paid-off student loan or other account no longer active along with a new credit card opened less than six months ago, together they can generate a credit score for you as of the moment the new card appears on your credit report.

With the more commonly used FICO rules being tougher than VantageScore’s, I suggest you set your sights on meeting the FICO requirements, knowing you’ll then have a score regardless of which system the auto lender taps into.

See your scores before the lender does
As a last step before stepping onto that showroom floor, you’ll want to actually see those scores in advance of your auto shopping. This way you’ll have some idea of what interest rate to expect, based on your score.

You can get your VantageScore for free at CreditCards.com. Your FICO score is available via a couple of sources:

  • MyFICO.com sells various FICO score versions from each of the credit bureaus for about $20 each. Since these are the scores most likely to be used by your lender and the fewer the surprises the better at a time like this, the cost will be well worth it.
  • Your card company may be one of the many banks that provide free updated FICO scores to its cardholders with every monthly statement. If so, this will not only give you your score upon reaching the 6-month-old mark, it will also provide an explanation of the key factors affecting your score and how lenders are likely to view your creditworthiness.

Now that you’ve got the nuts and bolts of what it takes to build a great credit score, good luck with this car purchase and all future credit endeavors!

See related: What is a good credit score?Steps to building your credit before first auto loan

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Updated: 11-24-2017