Credit

A credit score is a number that shows how likely someone is to pay back money they borrow. A credit score can range from 300 to 850, 300 being the lowest credit score you can have and 850 being the highest. The higher your credit score is, the more benefits you will receive. Having a high credit score will allow you access to things such as:

  • More housing options
  • Lower rates on auto insurance
  • Easier access to utility services
  • Lower interest rates
  • Not needing a co-signer

Building and maintaining a high credit score is important. There are five components that go into calculating your credit score:

  1. Payment History (35%) This looks at how often you make consistent and on-time payments. If you are more than 30 days late even once, that record remains on your credit report for 7 years and will result in a drop in your credit score. 
  2. Amount of Debt (30%) This looks at how much total debt you have versus how much your total spending limit is. A good tip is to try and keep your debt utilization ratio (amounts owed/total credit limit) below 30%. For example, imagine you have a credit card with a limit of $300. To keep your debt utilization ratio below 30% you would spend no more than $100 on it, even though your limit is $300. This will help raise your credit score. 
  3. Length of Credit History (15%) This looks at how long you have held credit for. A tip to build credit history is to open a credit card with no annual fees, keep your debt utilization ratio low on your credit card, and pay it off in full each month.
  4. New Credit (10%) Whenever you apply for a new type of credit (car loan, credit cards, mortgages, etc.), the lender will run a credit check on you. This can lower your credit score, but having multiple lines of credit that you make consistent and on-time payments on will raise your credit score over time. 
  5. Credit Mix (10%) Having multiple debts and consistently making on-time monthly payments signals to lenders that you are a responsible borrower. Examples of a credit mix are having a credit card, auto loan, and student loan. Don’t take on more debt than what you can afford. 

A credit report is a record of a person paying back your loans over time, and it will also show you your credit score. It is important to check your credit reports for any errors so that you can have the highest credit score possible. Credit reports are compiled and sold by credit reporting agencies. The top three largest agencies are Experian, TransUnion, and Equifax. Lenders may look at a single credit score from one of these agencies, or a median of all three to determine borrowing eligibility. You can get a free credit report every year at AnnualCreditReport.com.

It can be hard to build credit as a student because a) you don’t have a long credit history, and b) you don’t have a lot of disposable income to pay back credit debt. Three ways that we recommend you start to pay back your credit are:

  1. Pay down your student debt: Paying down your student debt can not only save you money on interest, but also raise your credit score. If you are financially able to do so, try and pay more than the minimum to your student debt. 
  2. Become an authorized user: Ask your parents or guardians if you can be added as an authorized user on their credit cards. Every time that they make their credit card payment on time, it will not only raise their credit score, but yours as well. This is a great and easy way to start building your credit and payment history. 
  3. Pay your bills on time: On-time monthly payments are a huge part of building your credit score. It is easier to lower your credit score than to raise it, and even paying one bill late could take you months to rectify. Set up automatic payments on your monthly bills to ensure they are consistently paid on time.
  4. Open a Student Credit Card: If you have self-restraint and are a responsible spender, opening your own student credit card may be the right option for you. Keep your debt utilization ratio low and only put a little bit of money on your credit card each month. Set up automatic payments so your card is automatically paid off each month. Never put more money on your credit card than you can afford to completely pay off. If you have a credit card and find that it is too big of a temptation, remove the card from your phone wallet or physically remove the card from your wallet so that there is no temptation to use it.
  5. Check your credit report: Consistently checking your credit report for errors is a good habit to create so that you can ensure your credit score is as high as it can be. If you find an error on your credit report, dispute it with the credit reporting agency so it won't reflect poorly on your credit score.