This entry is part of a series of topic blog entries examining how college students may build good credit in tough economic times. As an activity for a multiplatform storytelling graduate course, these entries display my contribution to contemporary journalism in relationship to blogging/online writing and storytelling without compromising traditional journalistic methods such as accuracy and timeliness.
As an undergrad, at times, it was easy to feel as though being in college was like living in a separate world. I did not have major bills and I did not work a typical 9 to 5. Where else does your day consist of going to class for a few hours, eating on a meal plan and taking afternoon naps?
As graduation approached, I got a wake-up call: It was time to decide whether I should take out student loans for graduate school.
Even if you choose not take out loans to attend grad school, your credit score still matters. Good credit may make it less stressful to enter the work force, buy a home or car and even get married.
What is good credit?
“Good credit” means that it may be easier to get loans and lower interest rates, which may result in smaller monthly payments, according to the Federal Trade Commission (FTC). Your credit history is available on a credit report that may be ordered from consumer reporting companies. I recommend Equifax, which offers a user-friendly summary on how to understand the credit report as well as tips on how to improve your credit score. (Find out to obtain a free yearly credit report here.)
Your credit score, commonly known as the FICO score, ranges from 300–850. Although there is no cut-off number that determines whether you qualify for credit, the higher the score, the less of a risk you appear to be to potential lenders according to myfico.com.
Tips to build good credit
The Equifax Credit Report™ offers steps to take to build good credit. Visit Equifax for more tips.
Apply for credit from different places. Mix it up (but not too much)!
Open different types of credit accounts such as car loans and credits cards, but avoid applying for/opening too many accounts. To show lenders stability, try to keep your oldest credit account open and avoid opening too many new accounts, which may lower average account age and may your credit score suffer.
Beware who accesses your credit report
Try to apply for credit on as needed because too many inquiries on your credit file may turn off lenders.
An inquiry is a request for your credit history, according to Equifax. Although some do not affect your credit score, inquiries appear on your credit report for two years. Usually, when applying for loans or credit, these inquiries negatively impact your credit rating.
On the other hand, inquiries from employers or credit reporting agencies do not negatively impact your credit rating, and you can only see them. If possible, when applying for loans, limit multiple inquiries to short period of time. (When lenders see a series of credit inquiries at one time, they will take into account that you were searching for rates.)
Pay your bills on time … every time
Regularly make payments on time to avoid collections and public records, which negatively impact your credit standing. Avoid having your account go into collection. This is when the lender or credit company seeks a third party collection agency to literally collect the fund that you have not paid as agreed. This could lead to the a public record documentation on your report if your debt remains unpaid and parties owned seek legal action such as liens or judgments.
Making timely payments to these accounts positively affects your credit score, but having high debt to credit ratios on revolving accounts (accounts with set credit limits that require monthly minimum payments) and installments loans (loans in which payment amounts are predetermined) may hurt your credit score.
Remember, an account that has a negative account status and late payment history appears on your credit report for seven years.
Be accountable for your financial history
No matter how much planning you do, emergencies – and mistakes – happen. So, if you are unable to make a payment on time, then let your credit card company or lender know as soon as possible to make other arrangements.
Yes, students have enough to worry about outside of their wallets, but not knowing is never a good excuse for poor credit ratings. The best way to establish good credit is prevention. Know your rights and regularly check your credit report. If you are swamped with studying, sports, work, etc., and just do not have the time, consider signing up for a credit watch program through one of the credit reporting agencies, which notifies you of any changes to your credit report.
Erika, your subject is very important and you are offering lots of good information. I have noticed that many employers check credit score, as it seemingly indicates what type of work ethic the applicant has. I find this slightly odd, seeing as our recession was due in major part to the financial mishaps of major companies and banks.
As an undergrad I noticed a lot of credit card companies luring students in by offering freebies, like pizza or gift certificates. Students took the bait and wound with ridiculous interest rates and often mismanaged their accruing debt.
I built my credit slowly by taking out secured loans. That meant I had to have matching funds available in my savings and make monthly payments. It sounded silly, but it began to improve my credit. I started off with a small amount on my first credit card and always paid off my purchases. Soon the amount was increased. It has been a four year process, including paying bills on time like you suggested, but now my credit score makes me eligible for a home mortgage.
Setting up bills electronically is helpful, and have payments automatically withdrawn.
Good stuff, thanks.
Those were all necessary and valid tips, definitely worth outline and explaining — an online PSA.
Sometimes I wonder if people fully understand the debt to income ratio, and how important it is to keep an eye on that. I also wonder if people fully realize how long it takes to pay off anything when paying the minimum suggested amount. And the thing I think is the trickiest, planning for emergencies, or for “when it rains” as my mom use to say, is a doable thing if it is made a priority.
I know my parents impressed me with the need to have a safety net, or a minimum amount in an accessible account, for car repair, vet bills, and such. I also was schooled to keep a certain amount of cash for fun, and once it was gone, it was gone.
These day, if I want something at it is a little more than I have here or there, the credit card is so easy to make up for, until those $5 here and there begin to add up.
Once I learned how much I spent a week and then a month on lunch and the vending machines, I started packing my lunch.
Today, I almost feel entitled to have a $5 latte or a $9 burrito, because it seems so normalized.
Is there more pressure today to spend money on food and beverages, and to allow credit cards to make up the difference to buy the things we want? From your perspective since you’ve taken up this subject, do you see a generation of young adults succumbing to commercial pressures and being given access to what use to be considered luxuries on every corner? Or do you see some backlash to all the Chipolte’s and Starbuck’s being thrown in their faces?
*Alix: Thanks! I commend you for actually taking the initiative to repair your credit rather than sweeping the situation “under the rug” and hoping the debt with disappear. I am sure if more students took the time out to look into secure loans, a lot more of us would not be fighting the never-ending battle against monthly credit card balances! At this rate, if students do this at the beginning of college, like you, by the end of college they may be able to finance homes and cars. Thanks again for your input!
*Dawn – You always offer such good points on this topic! Of course my generation succumbs to pressure to spend … spend … spend. No matter how much debt we pile up, my generation is an instant-gratification generation who – as my parents would say – must “let life beat us up” before we learn our lesson. We want to get what we want NOW … NO MATTER WHAT – even if it means racking up debt to do so. In fact, it has become second nature to simply charge lattes and fast food meals and deal with the debt later. However, in a few years when we begin to really settle down and try getting loans for homes and cars, we will have to suffer the consequences (i.e. loans with ridiculously high interest rates, rejection of loan applications, etc.) of charging convenience store purchases on credit cards and not paying them off in a timely manner.
Erika,
I think this is a really great topic for anyone, but especially young people. Oftentimes, people of our generation have no experience or knowledge of these issues because their parents supported them 100% financially up until or throughout college. Then they get into the real world, rack up debt, and don’t know how to prioritize. I used to envy my friends in that situation who had not a care in the world while I always had to work throughout high school and college. But now I’m grateful that I didn’t have to learn those lessens when hit with all the other realities of the “real world.” That doesn’t mean I’m the most financially responsible person (shopping addict here), but I’m glad my parents didn’t give me everything and made me work.
Maureen – Great point. I went to school with many students who did not know how to manage money simply because their parents never taught them. However, I’m sure classmates like these are getting a rude awaking and experiencing the “real world” earlier since the economy is not the greatest. Many of these students are now forced to make decisions such getting a job for the first time, taking time off from school, etc. Still, financial knowledge should not be a privilege. Some schools make students take a mandatory alcohol awareness mini course or test upon entry into the school. They should also do something similar for financial management (outside of what loan companies make you do when borrowing money).