College Student Series (Article 4): What Does the Credit Score Mean?
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 articles in this series, please start by reading them in order so that you have a firm grasp on credit scores and how they are calculated. Find those articles below:
Why is Credit Important
How is Credit Calculated Part 1
How is Credit Calculated Part 2
Now that you have read those articles, understand that this post will build on those concepts you learned. We are now going to break down what a credit score number means and how to build it and keep it at a level that is going to give you low loan rates in the future!FICO breakdown
First things first, you have to see your credit score before you even can tell where you fit into the chart above. So go to Credit Karma and set up a free account. It updates weekly and is secure. Almost all travel credit card users swear by Credit Karma.
After you know your score, we can expect it to be in the “fair” range if you are completely new to credit. This doesn’t mean you should freak out because it is not in the “good” range, but rather it should be your goal to get it into the “very good” range before you graduate from college!
What is the goal?
As you can see from the chart above, you want to be above 740 at all times. You are going to get better interest rates and have no problems being approved for loans at that range; however, you are going to start out well below 740 when you have no credit history. So you need to start building credit now!FICO Range
After I get above 740, then what?
Keep making smart credit decisions by paying off your loans on time, keeping your amounts borrowed low per month, have a strong mix of credit accounts, and don’t apply for too much new credit at once. Once you keep your credit score growing and make it around 800 it will be very difficult to raise it much more until you get older and your accounts have some age on them. So once again, don’t freak out if you are at age 26 and can’t seem to raise your score much past 800. That will come with time!
What makes me look good to a lender?
If you apply for a car loan at age 26 and you already have a score of 800 then the lenders already know that you are extremely dependable and are financially savvy. This means they will likely want to start a relationship with you immediately because they could have a working relationship with you for a lifetime, and you look like a sure thing to them! Compare that to someone in their upper 50s at an 800 score, and it is almost expected that they would have a higher score based on the age of their accounts.
The good news about credit scores is that they are always changing. Someone with a high score could quickly drop if they miss a few payments. Low credit scores can quickly rise if you make smart decisions with your money and pay on time. While using the chart below, you can see there are ways to raise your credit if you are new to credit or you messed up your credit.
1. Pay your loans off every month in full and on time.
2. Don’t use more than 10% of your credit every month.
3. Keep your old credit cards and don’t cancel them unless they have an annual fee and you aren’t getting your money’s worth.
4. Don’t apply for too much new credit at once. Space it out over 2 years.
5. Have different types of credit on your report, like a mortgage, car loan, credit card, student loans, etc. Just make sure you pay those off quickly so the interest doesn’t take all of your money.
There are two places where people screw up their score most often, and it happens to be the two biggest reporting categories:
1. Paying on time
2. Using too much of your credit
Paying on time
I haven’t understood yet why people don’t pay their loans off on time. I know some get behind on their money, but it is only a mature thing to do to pay back your borrowed money and to keep track of when they all are due. For credit cards, you can request to have your statement closed on a certain date. For instance, I get paid on the 15th of every month, so my statements close on the 20th of every month. All of my credit cards are set up this way so that I know when to make payments.
Using too much credit
Mike spends more money than he has one month. But it was only $300 dollars that he couldn’t pay off. He did the same thing the next three months. After four months of this his credit utilization ratio is well over the 10% that is should be. His credit is going to drop quickly!
I cannot emphasize this enough for someone with few credit accounts:
ONLY USE LESS THAN 10% OF YOUR CREDIT PER MONTH!!!
This means if you have a credit card with a $1,000 limit, you cannot charge more than $100 PER MONTH on this card or else your score will not rise quickly. The advice I give everyone in this situation is to pay for your car’s gas one time per month with your card. That’s the only time you use the card all the way through college. At the end of graduation your credit score is going to be as high as it possibly can be if you do this!
Look at the interest rates above based on your credit score. As stated in the very first article of this series, you are probably going to need a loan of some sort when you graduate from college. Don’t you want the lowest interest rate possible? Then follow the directions laid out in these articles to raise your credit score as much as possible!