Students: Take the Time to Fix Your Credit

For millions of Americans, student loan debt is one of the largest financial obligations they’ll ever have in their lives, one that can take years or even decades to pay off in full. As such, it’s important for those who are leaving college to do routine maintenance where their credit is concerned to make sure they have a good credit score soon after graduation.

Young adults in particular may benefit from taking the time to do a little credit repair because of the lifetime of major financial decisions that likely lay ahead of them, but many may not know where to begin simply because they are still relatively new to the borrowing ecosystem. Most college kids these days probably have student loan obligations of some type — and the average student these days owes tens of thousands of dollars on these obligations — and many also have credit cards or auto loans as well, totaling several thousand more dollars that they owe to lenders before they even enter the real world or gain complete financial independence.

As such, it’s vital for students to know what goes into fixing their credit and how they can take the necessary steps to do so, because having a good credit standing can be an important part of a strong financial future.

What goes into a credit score

There are five factors overall that are used to determine a borrower’s credit score, regardless of their age, borrowing background or other details that some might think are part of the equation. And on the whole, they’re relatively simple to understand.

The single biggest determining factor that sets a borrower’s credit rating is their payment history, which accounts for 35 percent of their total score. Essentially, all this factor means is a person’s ability to make all the payments across their various outstanding accounts on time and in full. Just one missed deadline here can undo months or even years of hard work at paying bills, so it’s best to try to stay current on everything.

The other massive consideration is the amount a person owes versus what they’re allowed to borrow, as a percentage of total limits. This makes up another 30 percent of a borrower’s rating and the best way to make sure a borrower is maxing out this portion of the score is by not maxing out their cards. Lenders like to see borrowers only carrying debt that makes up about 30 percent of their overall limits, and any more than that will begin to cut into their credit score.

The other considerations may be a little trickier for younger borrowers to get a handle on for a few reasons, but combined, they only add up to the final 35 percent of the score overall. The biggest remaining factor is the average length of time a borrower has had their various accounts, and longer is considered better because it shows lenders that consumers can be responsible for years or more. Young borrowers don’t really have the chance to get long borrowing histories together in an effort to maximize their score here, but the passage of time will help with that.

The other two factors, accounting for 10 percent each, are credit mix — that is, the number of different account types, like credit cards, auto loans, student financing, mortgages, etc., in a person’s name — and the number of inquiries they’ve made for credit in the past several months. When it comes to credit mix, lenders want to see borrowers who have a number of different account types because it proves they can juggle obligations with different repayment rules and other considerations responsibly. But where applications for new loans are concerned, lenders want to see less; they feel that repeated attempts to acquire financing are a sign of cash flow problems, in general.

So how to repair credit?

Fortunately for college students, it can be easy to fix credit prior to, or soon after, graduation. All it takes is time and a little hard work. If they’ve missed a payment or two in the recent past, several months’ worth of hard work, as well as working with a credit repair company to correct the negative mark, can smooth over the issue. If they carry too much debt, cutting back on card use and making larger payments to slash it will help improve their debt utilization ratio. And if they’ve applied and been rejected for new accounts, taking a few months before doing it again can help as well.

Credit mix and average length of account history is harder to fix for those with limited borrowing histories, but patience here is the key.

Finally, students who want to fix their credit should also take the time to order copies of their credit reports and check them over closely for any unfair markings can be helpful. If any are discovered, working with a credit repair company may be able to address the issue quickly.

Posted in Credit Repair
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