Credit reports and credit scores exist to help lenders evaluate the degree of risk in lending you money. Basically, will you pay them back and on time?
Establishing good credit habits—and earning a high credit score—is a smart personal goal for all students as they move into a wider economic world.
Each fall, millions of students are lured with easy-to-get credit cards and start using them without understanding how credit works. Yet the credit history you build during school has the potential to help or harm your future more than your GPA. Employers, landlords, car dealers, insurance companies, and others routinely check credit records. More immediately, credit problems may often delay, interrupt, or derail more students’ college careers than academic failure. Up to 10% of college students now drop out due to consumer debt, according to Dr. Robert Manning, a professor at the Rochester Institute of Technology and author of Credit Card Nation.
Building good credit is up to you Your credit “score” is a mathematical calculation that represents all the information in your credit report as a single number. Your credit score is “fluid” (i.e., it is recalculated every time a credit inquiry is made against you) and ranges from 300–850 points. 692 is the national average credit score according to Experian, a credit-tracking firm.
A very good credit score (720–750 and up) will help you borrow (a car, your first home, a business start-up loan) at more desirable financial terms. Over time, that can save you tens of thousands of dollars. The longer you have a positive credit history, the higher your credit score will be.
Basic tips about building and maintaining good credit
- Pay your bills on time.
- Pay more than the minimum balance on revolving credit accounts (e.g., credit cards).
- On revolving credit accounts, keep balances (the outstanding amount owed) under 50% of your assigned credit limit. The closer your balance is to the credit limit, the more negatively it affects your credit score.
- Exceeding your credit limit reduces your credit score.
- Avoid late payments. A single reported 30-day delinquency (late or missed payment) can reduce your credit score as much as 75 points. Further delinquencies (i.e., 60 days, 90 days, 120 days, etc.) lower it even more when combined with a short credit history.
- Avoid 100% financing on depreciable items (ones that lose monetary value over time) like an automobile. The more costly the item being financed, the more negatively it will impact on your credit score.
Know what your credit reports say By law, everyone is entitled to one free credit report every 12 months from each of the three major credit reporting agencies—Experian, Equifax, and TransUnion. You can request your reports at www.annualcreditreport.com or call toll-free (877) 322-8228. Errors are fairly common, so be sure to review and correct any inaccuracies. (Note: Credit scores are not included, but you can purchase your personal scores at www.fico.com.)
For clear, practical information about using credit wisely and developing brilliant money management skills, visit www.nelliemae.com/managingmoney.