With so many things to consider as you make the transition from high school to college, your credit score hardly seems like your most important concern. The fact is, many college students first come to terms with their own credit status as they look for ways to cover tuition and other expenses associated with post-secondary education. And many are disappointed with what they find in their credit reports.
Young adults are at a disadvantage in the lending industry; primarily because most have not established themselves with long histories of borrowing money and successfully repaying it. Despite limited exposure, there are ways to move your credit standing in a positive direction – before, during and after college. The keys to increasing credit worthiness are understanding how financial interactions work and making sure your borrowing relationships always have positive outcomes.
Building a good credit rating doesn’t happen overnight, which is precisely why young people are not in the best position for proving their creditworthiness. Your credit health is based on a series of evaluations conducted by three primary credit reporting agencies. By looking at your borrowing and repayment history, credit agencies assign a number to your performance. The scale tops-out at 850, with scores above 700 representing what would generally be considered “good credit”.
To arrive at the figure, credit evaluation organizations look at the types of borrowing in your past. The highest scores are assigned to borrowers with long track records of repayment success. The function of your credit score is to provide assurances to lenders that you are able and willing to pay borrowed money back. Banks and other lenders want to limit their own risk levels, so they use credit reports to determine whether or not you are a safe prospect. And it isn’t only the number of credit accounts you’ve successfully managed, but also the types.
Types of Credit
There are essentially two types of credit that show-up on credit histories, influencing how credit scores are assigned. Revolving credit, on one hand, applies to credit relationships like the ones extended by MasterCard and Visa. Under the terms of revolving contracts, consumers make purchases and payments on a “revolving” basis, usually tied to calendar months. Purchases made during this month will typically bill during the following month, influencing the account balance and minimum payment requirements. Covering the entire cost of a purchase wipes the slate clean, without interest charges being added. When balances are carried over, however, the issuing creditor adds a few percentage points of interest to the card balance, which borrowers pay above and beyond the cost of items purchased.
Managing revolving credit accounts is a great credit-building opportunity for young people. Even if you only have one major credit card; making on-time payments and successfully managing revolving balances shows creditors you are responsible enough to meet your financial obligations.
The other class of lending that credit agencies evaluate is called installment credit. Unlike revolving terms, installment credit involves a single one-time loan, which is set-up for repayment over a designated period of time. Home mortgages, for example, extend for decades of repayment, requiring borrowers to pay the same amount each month, until the loan balance and interest are fully accounted for. Because they show long-term credit relationships, installment loans provide important references for creditors, who assign higher credit scores to individuals with proven installment loan repayment successes in their credit histories.
Automobile loans are excellent examples of installment loans undertaken by young people. While you may not take out a mortgage during college, a successful history paying back your installment car loan is an important credit-building opportunity. Missing even one payment can have a negative impact on your credit score, so repaying on-time should never be taken lightly.
In addition to credit cards and car loans, utility and phone contracts also furnish ways for college students to build and protect their credit standing. Staying current on required payments adds fortification to your positive repayment history, furnishing more examples for credit agencies to look at.
Even student loans are part of your credit history, so staying on pace with repayment is another way to shine among creditors. Never let a student loan default – it has negative impacts on your credit rating. Instead, use deferments or grace periods to offset payments until you are financial able to cover your commitments. Working with lenders before you run into problems is a much better strategy than picking up the pieces following student loan default.
While college students don’t always have the lengthy, diverse credit history shared by seasoned borrowers; there are still ways to move credit ratings forward. Above all else, take care to manage your accounts properly; repaying loans on schedule and keep revolving accounts current.