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 for 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, the 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 the 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, the 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 using a score known as “credit score.”
What is credit score?
This is a code that comprises of three numbers. These numbers basically sum up your credit history. They are used by most lenders to determine whether you are worthy of credit or not. The score is usually calculated by credit bureaus using a secret process that they never disclose.
Your history shows the number of credit accounts you currently have. This means the loans you have taken out, and any credit cards you currently possess. It will also include information about mortgages as well.
In addition, your history will tell the lender about how severe your late repayment history really is.
Usually, these are made by creditors, and they find the information about you from the various credit bureaus, who tell them whether or not you qualify for additional credit. The calculation that is usually done on your credit report will also give the creditor information on whether you have the ability to take on more credit or not.
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
This is very important and it is used to check the overall limit on your card. These are the cars you are currently using. The rule, according to experts is to always ensure that you spend less than 30% of the limit on your card.
The higher the rate of utilization, the lower your chances shall be of being approved for credit, and it also shows your potential creditors that you really cannot be trusted when it comes to loans.
This is a popular credit score source that was made by the Fair Isaac Corporation.
Its range is between 300-850.
If your score is over 670, it is considered good, and anything that goes beyond 800 is excellent.
% of people
|300-579||Very poor||17%||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.|
|580-669||Fair||20.2%||Any applicants in this range are subprime customers|
|670-739||Good||21.5%||Only 8% of customers in this range of credit score are likely to delinquent on their loans.|
|740-799||Very Good||18.2%||This category of customers will get very good interest rates from lenders.|
|800-850||Exceptional||19.9%||This is the top list of customers who get the best rates and the highest loans.|
Actually, this is a score that was developed by the three main bureause, i.e. Experian, TransUnion and Equifax.
% of people
|300-549||Very poor||16.7%||Applicants with this rate cannot be approved for credit.|
|550-649||Poor||34.1%||In this range you can be approved for credit, but the rates will be unfavorouble.|
|650-699||Fair||18.3%||You will be approved for credit but not at favorouble rates.|
|700-749||Good||12.6%||This category of customers will get very good interest rates from lenders.|
|750-850||Excellent||30.3%||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.