College Student Series: How is My Credit Calculated?

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 first article in this series, please go back and read why having a credit history is important. After reading that article, hopefully you have begun to realize that even though building a credit history sounds scary and different from things you have done in the past, having good credit is essential for moving on with the stages of life.

Calculating a credit score, I promise, will at first seem like choosing arbitrary numbers. I am hoping you see that once you fully understand how it is calculated, you can make decisions and habits that will grow that number quickly. This article will focus on the two biggest indicators of your credit score, while later articles will finish out the less impactful indicators.

Where most people are confused right away starts with the seemingly imaginary reporting bureaus. The three major credit bureaus are:




You can get a free credit report from these bureaus each year, and it is recommended that you space out your free report. Example-January, April, and September.

When you apply for a car loan, the loan issuer will pull one of these credit reports. On the report will be all of your loans, your payment history, your credit usage, etc. If you apply for a home loan, expect them to do quite a bit more digging by pulling from all three bureaus, and you should expect them to look into your assets, savings, and checking accounts.

You probably have seen commercials or heard about FICO(Fair Isaac Corporation) scores as well as the other bureaus. Your FICO score is supposed to be a better determiner of your true credit, because it takes all of the information from the other reporting agencies into account.  Many of the credit cards, car loans, and home loans agencies are going to look at your FICO score first.  Because you should focus on raising your FICO score, we are going to focus the rest of the article on how it is calculated and how to maximize your score.

Payment History-35%

This is the biggest chunk of your credit score, and the importance of it being perfect cannot be overstated. Although a few cards do let you have one late payment before they report it to the credit bureaus, most cards or loan accounts will ding you as soon as you have one late payment. This is the time when a teacher says, “See, when I took off points when you turned in a paper late, this is why.” Creditors don’t care why you were late on a payment, and truthfully, neither reason is a reason that reflects well on you:

1. What you say: I was late because I had a lot going on and forgot

What the lenders hear: You are disorganized and may not know how to handle important matters.

2.  What you say: I was low on money and cut it too close.

What the lenders hear: You were low on money and now you are applying for another loan? Bad idea.

The only advice in this area is to be organized and know when your payments are due. For most loans nowadays it is easy to set up text or email reminders. In other words, there is no excuse to be late, and if you are late, it may stick on your credit report for years.

Amounts Owed-30%

Excelling in this category is all about getting the amount you owe each month to be less than 10% of your total credit limit but keeping the amount owed above 0% (If you don’t use your credit then creditors could think you are scared of credit). Since this series of articles is aimed to simplify credit scores, I am not going into all of the possible categories you could fall into based on how much you owe.  Truthfully, all you need to know is keep your amount owed under 10%.

The way you calculate the amount owed is very simple.  Take the total credit limit that you have, and keep what you owe under 10% of that total. This is most easily understood through a simple example:

You get a credit card and have a $1,000 limit. That means you need to owe less than $100 each month.  How did I come up with the $100? It’s 10% of 1,000.

If your credit limit is $50,000 at age 30, you need to keep your amount owed under $5,000 each month.

How do I keep my amount owed under $100 when I normally spend $200 per month on gas and food?

This is quite simple, but I would say that close to all college students do not understand this part. PAY YOUR BALANCE DOWN BEFORE IT IS DUE! You can easily do this through the bank’s app or through the website.

Realistic college example 1:

Your credit limit is $1000 on your credit card. You drove home for Thanksgiving and have bought a few Christmas presents on your card. Your statement closes on December 15th, and right now it’s Dec. 5th, and you owe $236. Go on the app for your credit card and pay off $200 on Dec. 5th. Then your statement closes on the 15th, and how much does the credit card company and the creditors think you owe that month? $36 only

Reasistic college example 2:

Your car breaks down and you put the $300 charge on your credit card, and you only have a $1,000 credit limit. You have also paid for gas this month, so your bank’s app is showing that you owe $380. Your statement closes on Dec. 15th, and it’s Dec. 10th. What should you do?

Pay $300 off of your card on Dec. 10th, so that when the statement closes on the 15th it will show that you only owe $80.

Why do I need to keep the amount owed under 10%?

When you spend more than 10% of your total credit limit it looks like you are low on money and are credit hungry. It looks like you are being a bad manager of your finances. If you keep your limit under 10% then it looks like you have credit options, but you are choosing to use the credit lent to you wisely.

I know so many adults that do not do a good job in this category month to month, and it’s because they won’t pay down their card before it is due. Getting a credit history in the college years is vital as discussed previously, and the quickest way to raise your credit score is to pay on time and use less than 10% of your total credit.

Pay your credit off every month, and keep the amount you use of your credit under 10%. If you do these two things, your credit score will climb over time.

The next article will be about the rest of the FICO score calculations and what the numbers mean. Please go back and read this article several times to get a true understanding of the amounts owed section.

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Please share this with your peers so that everyone can gain some understanding of how credit works!