A Guide to Credit Scores for College Students
Your credit score can make or break your ability to get a credit card, auto insurance or even a new job. It can play a role in whether you can rent a new apartment or buy a new home. And while you might not have mortgages on the mind quite yet, your credit is still a critical part of your financial life. Find out more about it below.
What Is Credit, and Why Is It Important?
Credit in this context refers to your personal credit history and score. Your credit history is listed on your credit report, which is published by the credit bureaus. It’s an accounting of how you’ve handled finances and debt in the recent past—typically over the past seven to 10 years or so.
That information is used in various formulas to create your credit score. Your score is a three-digit number that helps lenders and others see at a glance what your credit worthiness might be. A higher score means you’re a better risk for lenders, as it typically means that you have demonstrated you’re responsible with credit.
Factors That Influence Your Credit Score
There are different scoring models, including both FICO Score and VantageScore. Each takes a slightly different approach to coming up with your credit score, but the same five factors tend to carry the most weight. Those are:
- Your payment history, which is whether or not you pay your debts on time and as agreed. That makes up 35 percent of your FICO Score.
- Your credit utilization, which is how much of your credit limit on revolving accounts—such as credit cards—you’re actually using. That makes up 30 percent of your FICO Score. The age of your credit, which is how long you’ve had credit and how old on average your currently open credit accounts are. That makes up 15 percent of your FICO Score.
- Your credit mix, which is whether or not you have different types of accounts open. This makes up 10 percent of your FICO Score.
- Hard inquiries, which is how many times your credit has been pulled in the past year or two for the purpose of evaluating you as a borrower. This also makes up 10 percent of your FICO Score.
What’s “Good” Credit and What’s “Bad” Credit?
Credit scores generally range from 300 to 850. The exact range for good or bad credit depends on the model being used to create the score. According to the FICO model, a score of 670 or above is considered good. Credit scores of 580 to 669 may be considered only fair, and anything under 580 is typically considered bad or poor.
While you can get loans and credit cards with good or bad credit, good or excellent credit helps you get better offers and rates. That makes your debt less expensive in the long run. Good credit also helps you qualify for opportunities that you might not be able to access with bad credit.
How Do Student Loans Affect Your Credit?
Student loans can be good or bad for your credit score. Your student loans are typically reported to the credit bureaus just like any other loan, and they’re treated as an installment loan. If you pay your loans on time every month, that’s potentially good news for your credit score. By doing so, you’re establishing a positive payment history, which you already know is huge for your credit score.
The flip side, however, is that not paying your student loans on time could mean a negative hit to your credit when you’re just getting started. So, make sure to manage your loans responsibly, read all messages from your loan service and talk to your lender about deferments and other options if you know you can’t pay.
5 Credit Tips for College Students
Being responsible with a student loan is just one way to build your credit. Here are a few more tips for positively impacting your score in the future.
1. Use Credit Cards Wisely
Young adults tend to have a thinner credit file. That just means that you don’t have a lot of credit history because you haven’t been using credit for very long, or at all. And while it’s not anything you did wrong, it can be a negative thing when it comes to getting new credit. That’s because lenders are wary—you haven’t shown you’re responsible, so they might not want to loan you much money.
But credit card companies offer a variety of options for people with no or little credit—some specifically for college students. Applying for one of these cards and using it wisely is one way to build credit. Plus, if you have a student loan, that means you have both an installment and a revolving account—which is good for your credit mix.
2. Watch Out for Hard Inquiries
Hard inquiries occur when your credit is pulled by a company to consider you for approval as a borrower. Each recent hard inquiry on your report can drop your score by a little bit. So, applying for credit just to see if you can get it or applying until you get approved by someone can damage your score. Instead, do your research and only apply for credit when you need it and are reasonably sure you can qualify.
3. Pay Off as Much as You Can Every Month
Pay off as much of your debt every month as you reasonably can, especially when it comes to credit cards. That keeps your credit utilization low and helps positively impact your score. At the very least, pay the minimum amount due on time to keep your score from dropping because a late payment was reported.
4. Become an Authorized User on Another Account
If you have no credit history at all, it might be difficult to get approved for credit that’s to your liking. Loans and credit cards to help build credit often require security deposits and may come with higher interest rates, for example. One way to start building your credit is to get added as an authorized user on someone else’s account.
For example, if your parent adds you as an authorized user on their card, their timely payments may be reported to your credit report too. Don’t forget to ensure that the credit card company reports to all three credit bureaus and that the person in question does pay their bills on time.
5. Check Your Credit on a Regular Basis
Finally, make sure that someone else isn’t tanking your credit score before you get a chance to build it. Check your credit regularly to confirm that everything is accurate and to dispute inaccurate negative information that might hurt your score.
You can usually get your credit report for free from each of the three major bureaus—Experian, TransUnion and Equifax—via AnnualCreditReport.com once per year. Through April 2021, you can actually get your report once per week due to assistance options being offered during COVID-19.
If you find that your credit score is lower than you like or there is inaccurate information marring your good financial name, consider working with CreditRepair.com to work on repairing your credit and monitor it more closely in the future.
from a Credit Expert