The day approached fast and with no warning: being an adult. In the adult world, you need to think twice before swiping your brand new credit card. The real world draws many endless questions from young adults who are ready to be independent and live under their own roof but don’t know where to start. One topic that really stands out amidst the confusion: credit scores. Unfortunately, you cannot avoid credit scores if you plan on making any “bigger” purchases and decisions in the future.
Read on for expert insights on navigating the world of credit scores:
What is a good credit score?
Credit scores represent the risk that a lender may take when you try to borrow money. Let’s break down the numbers: First off, a credit score ranges from 300 to 850. You want to avoid being closer to 300 at all costs; the higher your score, the better off you’ll be. An average credit score typically lies between 600 and 750; anywhere below 600 tends to be frowned upon in the adult world.
However, if you have a low credit score it can improve with some hard work. “In school, your GPA is made up of various grades from different classes, similar to the way that your credit score contains different measurements,” said Simon Hunag, a finance professor at the University of Massachusetts, Amherst. A step towards improvement would be thinking about raising your credit in a similar way that you would work to raise your GPA. It will take some time and real effort, but definitely worth it in the long run.
How can I build credit in college?
We all have to start somewhere with any new thing in life, and the same applies to credit scores. Everyone begins their credit score journey with no credit score at all. So if you find yourself freaking out about not having any credit at the moment… calm down and stop worrying. Everything in life comes with time.
Despite what you may believe, you can definitely begin building your credit while in college. If you stay aware of what credit is and inform yourself of the opportunities you’ll have with good credit, you can work towards building it up. “I signed up for a Wells Fargo credit card before I was 18, and it was a huge benefit for me because I was responsible with it,” Huang said. Huang attended UC Berkeley, and built up his credit at a young age. If you focus on paying on time, then your credit score will take care of itself. By the time Huang wanted to get a mortgage or loan, this opportunity was available to him thanks to his credit score.
Additionally, paying attention to your credit score and building it up as student will benefit you in the long run. If you make payments on a student loan while in college, you will be paying off debt, which has a positive impact on your credit score. “Even if you’re just going out to eat, or purchasing anything small, always think to use your credit card,” said Anthony Fama, Vice President of Credit and Risk Management at Raistone Capital. By paying off small increments over time, your credit score will thank you in the long run. In other words, it adds to your “good deed history.” By the time you get to your late 20’s and have eight or nine years of on-time payments under your belt, you’ll be thankful for putting in the effort in college.
What hurts my credit?
Missing a credit card payment or car payment tends to be the two top mistakes that can drastically hurt your credit score. When using credit cards, take note of how much you spend and if you can pay it off on time. At the end of the day, you need to have the money to pay for what you purchase.
Overall, poor financial management really drives whether you obtain high credit or if your actions hurt your credit. Unfortunately, credit cards allow the opportunity for reckless spending. “I had friends in college who spent money beyond what they really had in their bank accounts,” Fama said. “Especially in college, a good skill to get in the habit of is being cautious and considerate of your finances.” Anyone can achieve good credit if they simply pay attention.
For college students, Huang recommends Credit Karma, an online platform that provides users with information about what affects their credit and how much balance they have. Credit Karma also gives recommendations on how to wisely use credit and maximize improvement. To top it off, you have the rare opportunity to check your credit report for free. For anyone looking to learn more about their credit score and the factors going into it, Credit Karma lays it out.
What does having good credit mean for the future?
Many great benefits go hand-in-hand with having good credit: like the increased opportunity for fancy, new credit cards and the opportunity to take out loans. Going off of these, people don’t realize that you also get more power with a higher credit score. Your credit score measures how reliable you are when it comes to paying off bills. Therefore, you get an upper-hand when it comes to negotiating for a lower price or a higher loan. Additionally, lower interest rates go along with good credit scores, so you’ll pay less money in the long run!
You need good credit to do many adult things, like taking out a mortgage, buying a car or opening a credit card with reward points. If you want to take out a loan one day, you need to ensure that you are a diligent individual who manages and consistently monitors credit in order to obtain that loan. “Lending plays a significant role in our economy,” said Scott Karch, National Sales Manager at Kwik Wholesale. “Most lenders and lending institutions will utilize a consumers credit rating along with other factors as part of their decision [making] process.” In addition, a good credit score can also help you to purchase smaller items, like furniture or a washer and dryer. “Once you graduate, eventually you’re going to want to buy your own car and live in your own place,” Fama said. “With that being said, you’ll probably need loans to make it easier to accomplish all of this.” Little do people realize, you can go on a payment plan even for things to fill up your new apartment with.
The bottom line
Anyone can earn a good credit score, if they follow the first step: being informed. We recommend you track your progress, so make sure to check your credit at least annually; platforms like Credit Karma make this an easier habit. In order to raise your credit score, remember to stay informed and get started as early as possible; then, you’re well on your way to success.
