College Student Series (3rd Article): How is My Credit Calculated? Part 2
We have decided to write some articles around finance and travel for college-age individuals with little to no credit history. Because traveling using points requires a healthy understanding of financial information and how to budget, this series of articles will address how to LEARN the best and safest ways to start a credit history. Our passion in life is to help others through teaching, and we firmly believe that high schoolers and college students need to be more educated in the areas of finance. Please read the information below carefully, and really slow down instead of skimming, because every piece builds on the next. Look for an article in this series over the next few Sunday afternoons.
If you have not read the previous two articles written on the topic of credit and credit history, please read them first.
1st article-Why is credit important?
2nd article-How is my credit score calculated? part 1
This article is now going to focus on the SMALLER impacts of your credit score calculation. The last article took care of 65% of your credit calculation, but it only consists of two categories: Payments History and Amounts Owed.
We will now be focusing on the last 35% of your credit score calculation, but it consists of 3 categories. In case you didn’t get the full importance of paying on time and not owing too much on your credit cards, please understand that the categories discussed in this article are extremely important, but they only represent a small percentage relative to your payment history and your amounts owed.
Hopefully you have read these articles because you want to get started with having good credit before you actually NEED the credit. While one person may graduate from college at age 23 with no credit history, someone else might be able to graduate at the same age and have 4 years of credit history. This makes the second person much more likely to be approved for a car loan, an apartment, or for getting a travel rewards credit card!
As I said in the last article, I am not going to instruct you on how to have “ok” credit. I want you to have excellent credit. For that reason, we all have to control the things we can control the best ways possible:
1. You are in total control of how much you owe each month.
2. You are in total control of managing your payments on time.
You are going to start off with the age of your credit history negatively affecting your score!
The goal is to have your average credit history at 9+ years. This is obviously impossible if you are getting your first account for any credit at age 18 or 19. That means 15% of your credit report is going to be really bad! The good news is we all have to start this way, so it’s not like you are starting off any differently than anyone else. However, unlike someone with a credit history of 10 years, you are going to have to make sure you manage the things you can control better, simply because you have less margin for error.
Every time you apply for a new account, your average credit history gets younger. For example, my oldest account is now 14 years old, but my average credit history age is just short of 5 years. This is because I continue to get new credit cards to travel for free. I am willing to stay in this range because of the benefits it gets me, but I wouldn’t recommend someone just starting out in credit to have more than one credit card.
Advice for a college student:
Apply for a credit card during your freshman year. Get your credit history started and get used to managing money without the help of your parents. Look for further articles from this website about the best credit cards for college students.
Sometimes this category is referred to as being the “credit mix.” The goal is to have lots of different types of credit in your history in order to prove you can handle all of the types of credit. The different types could be:
Retail credit cardPopular retail credit cards
I would not recommend a college student to have any loans besides small student loans and one credit card. Once you have a steady income after graduation, then fill out the rest of these areas, but make sure you aren’t losing money!
For example, after 6 years of teaching I had maxed out my credit it seemed to me at just over 800. I figured it was because of the age of my accounts. I studied credit scores very in-depth in order to fix every little detail possible, and found that a car loan and a retail card could add to my credit mix. However, I didn’t want a retail card or a car loan. What I finally decided to do was finance a car loan for a very small amount of money then pay it off in advance (had to make sure there was no prepayment penalty) and I got a retail card at Bass Pro Shops that I only used once. All of that to say my credit jumped after another year and has continued to rise since.
Advice for a college student:
Never get more credit while in college except for one credit card and your student loans.
This category is a rating of how much credit have you applied for recently (normally over 2 years). I cannot emphasize enough that a college student should have no credit lines except a credit card and student loans. After graduating, please apply for some travel rewards cards, but space out your applications.
Why must you space out your applications for new credit? Because applying for new credit rapidly makes it look like you have no money and need to borrow. This will drop your credit score significantly. Furthermore, any time you get a hard credit inquiry, which happens any time you apply for credit, you credit score will drop a few points. It will always make up for the drop plus some if you just pay on time and keep your balance low!
Advice for a college student:
This category shouldn’t be difficult for you since you won’t be applying for credit after you get your first credit card. After graduating and getting a steady income, only apply for a new credit card every 9 months until you are able to handle all of your monthly bills and have them organized.Travel rewards card(after steady income)
The calculation of your credit score mainly relies on how much you owe each month and your payment history; however, some other factors come into play with some a couple of them being out of your control at the current time. College students must take care of what you can control since you have less margin for error compared to an adult with a long credit history.