A typical college student has plenty to worry about, such as paying for school, holding a job, classwork, and the need to figure out what they are doing with their lives.
There is however one thing that they do not put too much thought into, and that is their credit score. Credit is crucial if you are a college student and it is essential for your everyday life and your financial future, even though you may not be aware of it yet.
As a college student, your life is just starting, and you are at a point where you are making critical financial decisions, and therefore credit is an essential part of your life. You cannot escape it if you want to succeed.
In this guide, we shall explain to you what credit means, how to build your credit score and how to increase it in case it is at a low point.
Let’s get started:
What is credit?
If you are in college, it is about time that you took complete responsibility over your finances, and most especially money management. You must start setting yourself up for a stable financial future, and this is where credit comes in.
You should be extremely interested in credit.
Credit is a measure of your trustworthiness in terms of finances. It can affect many different aspects of your life such as controlling the amount of money you can borrow, the interest rates you can be given if you decide to borrow, and even the types of jobs you can be able to hold.
Credit basically takes into account your entire financial history.
The earlier you start building your credit, the earlier you can start taking advantage of good credit. This will definitely save you vast amounts of money in the future, and it will also give you an opportunity to cultivate a saving culture.
How can credit save your life?
As mentioned earlier, credit will affect specific aspects of your life such as the interest rates you shall be given when you take out loans, which includes car loans, mortgages, etc.
You may think that interest rate is not all that important, if the difference is too small, such as the difference between 3% interest rate and 4% interest is only 1%. If you pay an interest rate of 3% instead of 4% on a mortgage of say, $200,000 you will end up saving more than $40,000, which is quite plenty, if you think about it, and so, interest rate is extremely important.
In order to get the lowest interest rates, you must have good credit.
How is credit measured?
Your credit is measured by “credit score.”
What is credit score?
Credit score refers to a number that has three digits, and it is used to sum up the information on your credit report. It is used by lenders as a way of determining your credit health. Credit scores are normally calculated by use of an algorithm that scoring agencies base on the information they have of your credit report.
But what is a credit report?
A credit report refers to data and information that is collected by credit bureaus about each of its lenders. There are dozens of credit bureaus, and all you need to do is concentrate on the most famous ones.
These credit reports are updated regularly based on the credit information you feed to businesses and other financial institutions which includes banks and credit card companies. Credit reports can be classified into three main categories;
Credit history – This refers to the type and number of closed and active accounts that you have. This includes credit cards, loans, mortgages, etc. it also refers to the age of these accounts, your credit utilization rate, your account balances, and your repayment history. It will also give the number and severity of your late payments.
Credit inquiries – whenever you apply for credit, the lender will conduct a pull of your credit report. This will apply as voluntary or a “hard” inquiry. This is different from involuntary which happens when you check for your credit rate online or when the potential lenders pull your report to pre-approve you.
Public reports and collections – This is information on overdue debts, and it is normally pulled by debt collectors, and it includes foreclosures, mortgages, wage garnishments, suits, and any liens.
Your credit report should also have your genuine identification information such as your name, address and social security number.
Okay, back to credit score;
The score is designed to predicting the likelihood that you are going to meet your obligations, and if you will delinquent on your payments.
One of the most common misconceptions is that everyone is assigned one score that is used by all lenders and credit bureaus to, but this is not the case. Most people have multiple scores which are slightly different because of the multiple numbers of credit bureaus, the different score methodologies and your credit information which is updated regularly.
There are hundreds of credit score companies, but the most common ones, and which we shall talk about are FICO Score and Vantage Score.
You do not have to worry about all the other credit scores for the other companies, and you should only keep track of the well-known scores from the above two companies, which are used by majority of the lenders in order to qualify you for credit.
A credit score ranges from 300-850 and depending on your score; you will be rated as either very good, good, fair, and poor.
How is credit score calculated?
Credit bureaus such as TransUnion, Experian, and Equifax normally collect millions of data that scoring agencies, and others use to crunch up and create your score.
Financial institutions, banks and credit card companies normally play dual roles when it comes to your credit information. The first is to approve you for credit when you apply for a loan, and the other is sharing your information with credit bureaus about your behavior, in terms of repayment history.
The scoring agencies then use the credit information in your credit report to calculate your credit score.
What influences your credit score?
There are many factors that come to play when it comes to your credit score. As mentioned earlier, this is not a random number, and it requires plenty of information before it can be calculated.
As a student who wants to manage your financial information, it is important to understand what has the potential of affecting you in terms of good or bad credit. Here are a few points you must be careful with because they inadvertently lead to a bad score;
Your repayment history:
This is the most important factor when it comes to the calculation and determination of your credit score. This is because it is able to show lenders whether you have been reliable in making payments for the loans you may have taken out in the past.
It is a very strong indicator of whether you are going to pay back the loan, or not. For this reason, if you have had one or two late payments that you thought did not matter, you may be in for a rude shock. Those few payments could potentially hurt your credit score.
If you have had multiple missed payments, these could lead to a “derogatory mark” on your credit report.
Age of your credit history:
Having a long credit history will potentially improve your credit score, as long as it is filled with on-time payments from your open accounts. Factors such as how long your account has been open, i.e. the age of your oldest report, and how long its been since you made your last payment can factor into your credit score rating.
Credit card utilization:
Your debt-to-limit ratio, which is also known as your utilization ratio, is used to measure the overall limit on your credit card that you are using. A good rule of thumb is to always keep your utilization rate to below 30%.
A very high ratio can lower your credit score because it shows that you have plenty of debt. It tells potential lenders that you have been overextending yourself and spending more than you have been making. In short, you are living beyond your means.
The utilization ratio is normally calculated by dividing the total number of outstanding balances with the credit card limit you have been given.
Popular scoring agencies:
This is one of the most popular credit scores that lenders use. It was created by the Fair Isaac Corporation. It has a range of between 300-850.
According to FICO, if you have a score of 670 and above, you are considered to have good credit, but any score above 800 is perceived as exceptional.
% of people
Applicants with this rate cannot be approved for credit, and they are required to pay a fee or deposit some money when applying for credit.
Any applicants in this range are subprime customers
Only 8% of customers in this range of credit score are likely to delinquent on their loans.
This category of customers will get very good interest rates from lenders.
This is the top list of customers who get the best rates and the highest loans.
This was developed by 3 main credit bureaus which included Experian, TransUnion and Equifax. They also use a range of between 300-850. A score of 700 from Vantage is considered good, and anything above 750 is excellent credit.
% of people
Applicants with this rate cannot be approved for credit.
In this range you can be approved for credit, but the rates will be unfavorouble.
You will be approved for credit but not at favorouble rates.
This category of customers will get very good interest rates from lenders.
In this category, applicants will receive the best rates and the most favorable conditions.
As a student, you may be thinking that it is too early to start thinking about your financial history and your future, but its never too early. Avoid taking out loans that you do not necessarily need, and most important of all, DO NOT take too much credit card debt.
Credit card debt is cripling a majority of Americans, and they will tell you that it started while they were young. This will mess you up later on in life, and therefore be very careful how you conduct yourself when it comes to money matters. You could end up paying for your mistakes for the rest of your life.