Have you enrolled in Credit 101 yet? You know, the class that teaches you how to build a credit history and a fiscally sound future? Unfortunately, courses like that don't typically show up in most college class schedules, even though they should. Understanding credit
is so important and knowing how to use it the right way will make your life much easier down the road. While you may already have a lot on your plate during the college years, there's actually no better time to start building your credit history. The simple steps you take now will help you get that new car or house in the future. Having a great credit history can even help you land the job you want after graduation.
Did you know that credit is not used only for credit cards and loans? Here is a list of additional things you may need at some point that could take your credit score into account:
- Car insurance
- Cell phones
- Utilities (gas, water, electricity, etc.)
- Apartment rentals
- Bank accounts
To many companies, you are your credit score
. It’s a number they use to determine whether you qualify for an account, or whether they can charge you extra money because you’re a bigger risk. For example, cell phone companies will often require a large deposit for people with no established credit or poor credit.
Many people mistakenly believe that everyone starts with a perfect score and points are then deducted whenever you mess up, like being late on a payment, or not paying an account at all. You actually have to start using some credit in order to establish a credit score. Once you have a score, it will either go up or down depending on how you manage your accounts over time. So what kinds of credit will be able to give you a credit history and a credit score? The main types of accounts include credit cards, installment loans (car, mortgage
, furniture, etc.), and student loans.
If you have never had any credit, you may need a co-signer at first to ensure you can be trusted before a company will let you have your own account. If your parent or parents have a credit card that is in good standing, they can make you an authorized user on their account so you can start to establish a credit history without having to open an account on your own. If you do have a way to prove that you can pay, you may be able to open your own credit card, just be careful not to open too many. It’s very easy to get in trouble that way!
Start with one credit card, even if it has a low credit limit, and the longer you keep it open and in good standing (on time payments) you will begin to have a credit history. Your score will continue to go up over time as long as you continue making your payments. Keep the balance under 30 percent of the credit limit at all times if possible. If the balance goes over 50 percent of the credit limit, your score will go down. For example, if you have a credit card with a limit of $500, try to keep the balance under $150 and don’t let it go above $250.
A car loan is another great way to establish a credit history. Your score takes into account both credit cards and loans, so at some point it is a good idea to have an installment loan that you pay over a long period. You want to pay on the installment loan for at least 12 months in order for your credit history to see the benefits. The credit bureaus want to see how you do over a long period of time with a loan, as opposed to paying it off early.
Once you are done with school, you will most likely have student loans to pay as well. These are reported to the credit reporting agencies: TransUnion, Experian and Equifax. Be sure to always pay them on time. According to FICO, one of the largest companies that provide credit score software, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score — 780 — that same delinquency can send a FICO score tumbling by even more — 90 to 100 points.
When you graduate, you may leave the days of all-nighters and term papers behind, but your credit score will follow you. If you follow these simple steps, your credit score will open doors of opportunity. Start establishing credit
early, pay your bills on time, and your future self will thank you!