As a student, you are a primary customer for lender agencies. Whether you are still in high school or about to enter college and wondering about credit then I can say that building a great credit as a student is very important. The importance of establishing credit history young has one major advantage over students that just graduated because it is much more difficult to establish credit history due to the time fact of building the credit history already lost. As a student, it is very important to consider building your credit history as early as possible. And credit takes time to build.
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Now, personally I would suggest avoiding credit as much as possible, but in the mean time if you are sure you can pay it off within its monthly cycle or a 0% interest the credit become very useful in building your financial future and at the same time earning bonuses that can be redeemed. The best option is to apply for a small credit card as a student and use it for a few essential purchases here and there. Check out my recent post on credit cards I have had and currently have.
The scale which credit is evaluated and how lending companies evaluate your request decision whether it is the credit card, mortgage, auto loans, and yes even your employment (in fact 47% of employers run credit checks) decision and insurance based on this range:
Currently, the factors that affect you credit score are:
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History 15%
- New Credit or Inquiries – 10%
- Types of Credit Used – 10%
1. Payment History
Payment history is a major chunk of your credit score. Your on time paying bills affects your credit score more than any other factor. Major issues like payment issues, bankruptcy, foreclosure, collection will ruin your credit score which means that you will not get the best interest or even approved. The best thing I recommend to do is to pay on time every month.
2. Amounts Owed
Secondly, large portion of your credit score is amount owed which is the amount of debt you have overall to your total credit card balances. Example: You have $5,000 credit available, you purchase a $1,000 item which makes your utilization at 20%. (1,000/5,000=20%). The best thing again in this case for you to do is to pay down your balances and keep your utilization under 25%.
3. Length of Credit History
Next is the age of your accounts. It is the age of your oldest account and the average age of all accounts combined. Having “older” credit age is better for your credit score (for example it is like using someone else’s service and you would prioritize this company because of it’s prior experience in doing this for months or years instead of the company that just started a week ago). The point is it shows the lenders that you have experience in handling credit. Opening new account will impact your average age, so try not to open multiple accounts at once.
4. New Credit or Inquiries
Any time we inquire for a new credit card or loan application, this automatically results in inquiry. This inquiry gets placed on your record as you have applied for a certain type of credit. One or three inquiries will not have much impact on your score but several especially in a short period of time can cost you tens of points. So, try to keep your new inquiries to a minimum to help your credit score. The best thing about this is that only inquiries that were made in the last 12 months impact your credit score, inquiries fall off from your credit report after 24 months from requesting date.
5. Types of Credit Used
This one is actually interesting because the types of credit varies from credit cards to loans as you know. This shows your experience in managing different types of credit. For example, auto loan is different from your credit card experience. It is only 10% of your credit score and not as impacted but this will help your score to go up.
Lastly for the note checking your own credit report will result in a so-called soft inquiry and will slightly affect your credit.
If you are responsible young individual and want the best rates possible in the near future start building your credit as early as possible. I started when I was 18 and now I am 21 and already see the benefits of having established and great credit report. So, get your adult life a kickstart by following my steps listed that will make you a great borrower. Smart way to go for a student is using credit only for convenience. Therefore building a great credit as a student is beneficial for your future.