*This blog ran earlier this year, but we decided to post it again for Money Smart Week*
Raysha Duncan, Financial Aid Administrator & Purdue Alumna
Here at MyMoney our goal is financial literacy. We want to teach students and our readers how to be smarter with their money and that makes the topic of credit kind of taboo. You see, credit talks about your relationship with debt: how much of it you have currently, how much you’ve paid off, how good you are at paying back your debt, what kinds of debt you have. We don’t want you to be in debt, but we do want you to be informed. And, since the average college student graduates with at least $20k in student loan debt, you should know how that affects you.
Here’s the basic breakdown of what makes up a credit score, via wikiHow:
Payment history — 35%. How often do you pay your bills on time? Late payments hurt your score.
Debt usage — 30%. How much debt do you have in relation to your overall limit? Low debt and high limits is what you’re after.
Credit age — 15%. How long have you been establishing your credit? The longer the better.
Account mix — 10%. How many accounts or lines of credit do you have open? The more the better.
Inquiries — 10%. How often do you apply for new credit? Too many inquiries can hurt your score.
These are all taken into consideration and then get applied to a scale, typically between 300 and 850. You want to aim to have at least a good credit score, usually between 700 and 749. Go here for a breakdown of what the different levels of credit scores mean.
Your credit score is important for your future financial and personal prospects. Say one day you want to buy a house; the easiest way to buy a home is to take out a mortgage, and while paying the balance in cash sounds nice, it’s just not feasible for most people. And to get a good rate on that mortgage, you need a good credit score. This is probably all you’ve ever heard on the subject, with the exact same example (because it’s a good example). Now, how do you make sure you have a good credit score? Or better yet, how do you keep from having a bad credit score?
#1 Pay your bills on time
Every single one of them. Every time they are due. While you’re in college you can practice with your cell phone, utilities, and rent. Then, consider a credit card that you use for only very specific things (gas, perhaps) and pay that off on time, every time the payment is due. Once you’ve graduated, make sure you don’t default on your student loans (i.e. make your payments on time, every time).
#2 Budget your money
But…what does that have to do with credit? Everything. If you’re not budgeting your debts (e.g. car payment, rent, utilities, student loan payment), then you’ll fall behind on your payments and your credit will start creeping downhill. Remember that credit card I mentioned in #1? Don’t use it for unbudgeted expenses (with the exception of it being a serious crisis like emergency roadside assistance that’s not covered by your car insurance, not when you desperately need a latte). Only spend what you have available to spend and can pay off at the end of the month.
#3 Minimize your debt
Take out the minimum amount of student loans you need. Don’t use a credit card on things you don’t need. Save up for a big down payment on your next car purchase so your payments are lower and you’re able to make them on time. Keep it small so that it’s manageable and you can still pay your bills on time. Don’t take on excess debt. You’re in college, live like a college student now so you can live the way you want once you are debuted to the world.
#4 Keep an eye on your credit score
You can check out your credit score for free once a year from each of the three major credit bureaus (Equifax, Experian, and TransUnion). You can check it every three months by using each one once a year or you can check them all at once and compare (they may be slightly different). Watching your credit score will let you in on any changes that happen. Your credit score may go down some if you missed a credit card payment, majorly if you have unpaid medical bills, or drastically if your identity is stolen. On the plus side, if you’re managing your credit wisely you may see it gradually increase over time. And then you can credit yourself with the independence and security it brings!