Dear YOUNG MONEY,
Can you tell me what a credit score is and why your credit history is so important?
With 70 percent of college students using at least one credit card (with an average balance around $2,500) and 50 percent of students graduating with school loans to repay, credit management should be a required course. The way that you manage your credit and debt now can impact your financial future well after graduation.
First, let’s go over the basics of the credit system. There are three national credit reporting agencies that collect information about your finances: TransUnion, Equifax and Experian. These agencies don’t share their data so you have three distinct credit reports that record your credit and debt use.
Using your credit responsibly now can make a big difference in the rates you’ll receive later. When you apply for credit or loans, the financial institution checks your credit history from one or more agencies to see how “risky” you are as a borrower and what interest rates you deserve.
This is where your credit score comes into play – many creditors use a mathematical formula to quickly evaluate the information on your report and determine your credit risk. This calculation produces a credit score that commonly ranges from 300-850. A credit score above 650 will qualify you for standard interest rates and a score over 750 will help you get the best rates available.
Your credit score evaluates thousands of factors but the following five categories are the most significant:
- Payment history – A good record of on-time payments each month will help boost your credit score.
- Outstanding debt – High balances can harm your credit. Aim for balances under 35 percent.
- Credit account history – An established credit history makes you a less risky borrower. Think twice before closing old accounts.
- Recent inquiries – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
- Types of credit – A healthy credit profile has a balanced mix of 4-6 credit accounts and loans.
Negative information such as late payments, collection records and bankruptcy will remain on your credit report for 7-10 years. Too many negative records mean that you could be charged a higher interest rate or even be turned down for credit. Students should take extra care to ensure their borrowing options will be plentiful post-graduation. Staying closely in touch with credit card debt is an important first step.
According to University of Washington alumni, Mike Kang, it can be easy to push your credit card debt to the back of your mind.
“I knew that I was supposed to pay it back and there was some sense of responsibility there, but I was a freshman in college! I was very excited,” said Kang. “I would get the bills, and the first couple months I made my minimum payment. But as the months went on, I had no more credit. I would get money from my job, but paying my credit card bill wasn’t my first priority. I went on the Internet to find out where I could get more information on credit. When I first pulled my credit, my credit score was a 524!”
Post-graduation, Mike got his credit in order by checking his report regularly and carefully making on-time payments. “Now, I pull my credit four times a year. When I first did it, it was something that I did out of curiosity, but now it’s something that I do with enjoyment. Because, you know, after messing up my credit and spending two years to repair it, it’s very exciting for me to log on, buy a report and then check out my score and see how much it’s improved.”
Using your credit responsibly now helps you build a good credit foundation for years to come. When the time comes to buy a car or a house, your credit history will be an important factor in determining your interest rates and approval. You can read more about understanding and managing your credit online at www.truecredit.com.
Credit Education Specialist