The benefits of creating a strong credit history
College years are a great time to focus on building a credit history. Your credit score is a snapshot of your financial life that gives employers, businesses and lenders insight into whether you're fiscally responsible. Here's a quick course in building good credit.
Study up on credit score basics
Your financial habits—including your track record of paying your bills on time and the level of debt you have—are tracked by three credit bureaus (Equifax, Experian and TransUnion). Each bureau compiles its own credit report. FICO, the leading credit-scoring firm, computes a credit score based on the information in your credit report. Your score can range from 350-850. Typically a score of at least 700-720 is considered very good; it's a signal that you are careful and smart in handling your finances.
The importance of building credit history
You may be surprised how your credit history can impact so many parts of your life:
- Job hunt: With your permission, employers can check your credit score when you apply for a job. A good credit score is a signal to prospective employers that you're responsible. If your goal is to work in the financial services industry, the credit-score check can be especially important.
- Apartment rental: A landlord wants to know if you can be counted on to pay the rent on time. A poor credit score might lead a landlord to turn you down.
- Car loan and insurance: The great car-loan deals you see advertised are typically reserved for "qualified" buyers. Your credit score will be a key factor in determining your eligibility for the best financing terms. A high credit score may also qualify you for a lower insurance premium, as some insurers use a version of the FICO credit score when setting your premium rate.
- Utilities and cell phone: In setting up electricity, natural gas, or phone lines in your first apartment, your credit history can eliminate the need for a security deposit. A good credit history can also help you to get a cell phone contract without paying a deposit.
- Credit card and loan rates: When you're applying for credit cards and loans, a good credit score means your application is more likely to be approved. It's also more likely that you'll be offered a lower interest rate on the loan.
Develop good credit score skills
During college you can lay the groundwork for building good credit:
- Use a credit card. Bank debit-card transactions are not tracked by the credit bureaus. A key to building a credit history is to have at least one credit card that you use responsibly.
- Pay all your bills on time. Your track record of on-time bill payments is the single largest factor that determines your credit score, accounting for 35% of your total score.
- Pay more than the minimum on your credit card bills. Paying the entire balance due each month will have the most positive affect on your credit score. If that’s not possible, aim to pay more than the minimum due.
By building good credit while you're in school, you'll be off to a great financial start when you graduate.
What's next? 10 tips for paying off student loans
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