You’ve probably heard your parents talk about their credit score, and there’s always news reports and articles out there on how to get a better one. But, do you know what a credit score is, and why – as a college student – you should care? As an important part of managing your personal finance, having an understanding of how this score can affect you can save you down the road. Here’s what you need to know about your credit score.
What is a credit score?
Credit is any money loaned to you. This could be the credit card you carry around, or the loan you used to pay off your college tuition bill. The history you have with this credit is looked at and evaluated, and just like your tests, you are given a number based on how you have handled and managed it by three credit bureaus – TransUnion, Equifax, & Experian.
That number is your credit score. It ranges from a 300-850, 300 being the lowest and 850 being perfect. The average person should shoot for a 700 or better — roughly the equivalent of a B on a grading scale.
How do you get a credit score?
Your credit score number is determined by many factors. As a younger person with not much history (that is time having credit), your score will most likely start lower in the 5-600 range. To build it up, you will need to have a good payment history and a low debt-to-credit ratio. For example, if you have a credit card with an available balance of $1,000 and you carry a balance of only $200 after making minimum monthly payments on-time each month, your debt-to-credit ratio is 200/1000 or 20%.
However, getting a credit score isn’t that easy. As you may have noticed from applying for student loans without an already established credit score, you may need someone to cosign with you on your loans or credit cards. This is because history is on your side. If you do not have a credit card or loan of some sort, you’ll never get a credit score, and that could hurt you in the future.
Why it’s important to a college student
So why not go without? Why not just avoid credit scores altogether by sticking to your debit card or paying cash?
For one, paying in cash may not be available to you in the future. For example, your car breaks down and you need one to get to work. You can pay for much of it in cash, but you don’t have the funds to pay the rest. Having a credit score can help you get a car loan to pay the rest.
In addition, that credit score will determine the amount of interest you pay. So for that car loan, having a credit score of 500 may mean paying thousands more in interest over time than if you had a good credit history and credit score of 700. This is especially important for larger loans such as your student loans for graduate school or if you decide to buy a home.
And there are other repercussions too! Many landlords look at your credit score to determine if you will pay rent on time, or if you have the history to show responsibility for a regular expense. Not having a credit score or having an extremely low one may make your chances of getting an apartment or building wealth on your own practically impossible.
As a college student, it is important to consider building both your credit and credit history now. One option is to apply for a very small credit card which you only use for emergencies or a few essential purchases here and there. Pay it back every month and build up your on-time payments. By the four years of college, you’ll have a strong score that will ensure you’re ready for what waits you and your money after graduation.
This is a two-part post on the importance of establishing credit while still attending college. For tomorrow’s post, we’ll outline some tips you can use to make sure you’re able to build (and keep) good credit.
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