Credit

Credit

Credit is a major factor in today’s economy and determines your reputation as a borrower. To have the best reputation, credit wise, you should take the time to learn about managing your credit. This is especially important when it comes to renting an apartment, financing a car, buying a house, or even finding a job. The sooner you start building your credit profile, the better off you’ll be in the future.

Credit Report vs. Credit Score

A credit report is a detailed report of your credit history. It has personal information, employment history, and a list of open and closed credit accounts. You can get a free copy of your credit report once per year from each of the three credit reporting bureaus: Equifax, Experian, and Transunion. The website to check is www.annualcreditreport.com. It’s a good idea to review your report at least once per year to ensure accuracy and check for fraud. If someone were to fraudulently open a line of credit in your name, you might never know without checking your report.

A credit score is a snapshot of your credit risk at a point in time, based on your credit report. Credit scores such as FICO range from 300-850, with most Americans scoring between 600-800. For lenders, a higher score means a lower chance of default.

Lenders often charge higher interest rates when taking on higher risk, so a low credit score means a more expensive loan. Conversely, a higher credit score means a less expensive loan. With solid credit history you can pay less for many credit products like private loans, credit cards, insurance, auto loans, and mortgages.

Do Your Research

Before applying for a credit card, compare each potential card’s annual fees, interest rates, special rewards, and credit limit. Little differences can have major impacts. Once you choose a credit card and begin using it, make your payments on time and pay off your balance each month. Failure to do so can result in large fees and do serious damage to your credit score. Try not to carry a balance on the card; instead, make occasional and sensible purchases.

Components of Your Credit Score

• Payment History (35%) This is the largest factor and thus the best way to improve your score: make consistent, on-time payments. If you are more than 30 days late even once, that record remains on your credit report for 7 years and could result in a drop of 90 points or more in your credit score.
• Amount of Debt (30%) How much debt you have relative to your available credit makes up the second largest factor in your score. A good rule of thumb is to keep your debt utilization ratio (amounts owed/total credit limit) below 30%. Pretend you have two credit cards, and both have a limit of $500. To stay within 30%, you would spend no more than $300 between the two cards.
• Length of Credit History (15%) Lenders like to see long relationships with other lenders. One easy thing you can do to build credit history is open a no-annual-fee credit card, charge a few dollars each month, and pay it in full each month when the bill comes.
• New Credit (10%) Anytime you apply for a line of credit and a lender does what is called a “hard pull” on your credit score, your score can drop by a few points. This isn’t a big deal as new credit only makes up 10% of your score, but if you do this often enough it can substantially impact your score and ability to secure new credit. This information remains in your report for 2 years.
• Credit Mix (10%) Lenders like to see a variety of credit accounts in good standing because it signals that you are a responsible borrower. A person who is making monthly payments on a credit card, an auto loan, and a student loan is considered less risky. Your access to different types of credit may be limited as a student, and most lenders realize this.

U.S. News and World Report Student Credit Card Survey

Each year, U.S. News and World Report conducts a survey of students who own a credit card. From the results, they identify and address common credit topics such as credit scores, costs of credit, and providing tools that help guide students with credit card best practices. View the survey and guide here.