Credit Scores 101: A Primer For College Students

Understanding your credit score can be intimidating for anybody, especially college students becoming financially independent for the first time. But the more you know about your credit score from the get-go, the more prepared you will be to monitor your spending habits and make wise decisions when establishing new lines of credit. Plus, having a great credit score is crucial for that college student or graduate that wants to start their own business.

So what is a credit score, anyway?

Lenders calculate credit scores using a formula that’s based on information in your credit report, which is then compared to the information found in the credit reports of millions of other people. The higher your credit score, the better you look to lenders. Having a high credit score gives you access to lower interest rates.

The formula most commonly used to determine a person’s credit score is called the FICO model. Having a FICO credit score of 750 or higher is considered excellent credit. Although every lender may not use this exact model, it’s still a great tool to keep in mind when planning to make a change the way you manage your credit.

FICO Credit Score Model:

  • Past payment history: 35%
  • Total outstanding debt: 30%
  • Length of credit history: 15%
  • Recent credit card applications: 10%
  • Types of credit and loans maintained: 10%

Unfortunately, most college students don’t have much of a credit history or past payment history, yet they do have a substantial amount of outstanding debt as a result of student loans. This combination means the initial credit score for many college students is usually pretty low. This means that you will probably be charged higher interest rates when first establishing new lines of credit.

Companies consider credit scores for a variety of reasons that people might not realize, such as renting a house or apartment, getting a cell phone plan, connecting to a cable or utility service, and even getting braces. Almost everybody who will be collecting money from you for a period of time uses your credit score to predict how likely you are to pay bills. This is why, at times, having no credit can make an applicant just as unappealing to a lender as one who has bad credit.

How credit cards affect your credit score

Credit cards can influence your credit score in both negative and positive ways, depending on how you manage them. Keeping a credit card that you don’t ever use can lower your credit score because the credit company could cease reporting any activity, making it seem as though the card doesn’t exist. This would lower your overall available credit. However, canceling a card could also adversely affect your score, as this, too, would lower your overall available credit.

Logically, it follows that opening new credit card accounts can improve a credit score, as doing so increases your available credit. However, beware that having too many credit card accounts can also hurt your score. If you use a specific card every month, your score can also be lowered even if you pay off the balance in full at the end of the month. When this occurs the company doesn’t get a chance to report a zero balance on your card, only that you had carried a few hundred dollars on your account for the month. To improve your score, pay off your balance in full at the end of the month, and then don’t use the card again for a few months. This gives the credit company time to report that your current debt is $0 for an extended period of time, which will increase your score.

Improve your credit score

Here are some simple tricks to making sure your credit score stays on track:

  • Pay all bills on time, even if you only make the minimum
  • Don’t reach the maximum limits for loans or credit cards.
    Carrying low balances adds points to your credit score over time.
  • Maintaining old accounts can help your score, even they
    aren’t used very frequently.
  • Be careful when consolidating your debts. Doing so once may
    be beneficial for lowering interest rates and monthly payment amounts,
    but consolidating multiple times can adversely affect your score.
  • Avoid applying for unnecessary lines of credit. The simple
    act of applying for a department store credit card can knock your down
    score a few points.
  • Check for errors in your credit report frequently.
    Professionals who work within the credit industry are people too, and
    everybody makes mistakes sometimes.

While establishing (and maintaining) a high credit score undoubtedly requires a great deal of effort and personal discretion, doing so increases your ability so secure low-interest loans in the future. Getting a student loan, car loan, or mortgage later on will be less stressful with a good credit score. The extra effort you make now to increase your credit score will pay off in the long run.

This post was written by Chris from

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